Minrad International 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number: 000-49635

MINRAD INTERNATIONAL, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	870299034
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
50 Cobham Drive, Orchard Park, New York	14127
(Address of principal executive offices)	(Zip Code)

(716) 855-1068
Issuer’s Telephone Number

(Former name, former address and former fiscal year if changed since last report)

     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ      Noo

     Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yeso      Noþ

     The number of shares of the issuer’s common stock outstanding, as of the latest practicable date (November 9, 2007): 48,584,633

     Transitional Small Business Disclosure Format (Check one): Yeso      Noþ

MINRAD INTERNATIONAL, INC.
FORM 10-QSB
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)
	Consolidated Balance Sheets at September 30, 2007 and December 31, 2006	3
	Consolidated Statements of Operations Three and Nine-month periods ended September 30, 2007 and 2006	4
	Consolidated Statement of Changes in Stockholders’ Equity Nine-month period ended September 30, 2007	5
	Consolidated Statement of Changes in Stockholders’ Equity (Deficit) Nine-month period ended September 30, 2006	6
	Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2007 and 2006	7
	Notes to Financial Statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3.	CONTROLS AND PROCEDURES	16
PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 2.	UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS	17
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	17
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	17
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	17
	SIGNATURES	17
EX-31.1
EX-31.2
EX-32.1

2

Item 1.Financial Statements.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)

	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	118		$	4,664
Investments		—			7,249
Interest receivable		—			86
Accounts receivable		3,304			10,473
Inventories, net		14,176			4,360
Prepaid expenses and other current assets		1,607			1,477
Total current assets		19,205			28,309
Property and equipment:
Machinery and equipment		3,027			2,420
Computers and software		1,446			571
Furniture and fixtures		797			662
Leasehold improvements		385			385
Construction in progress		15,135			4,177
		20,790			8,215
Less accumulated depreciation		1,973			1,234
Total property and equipment		18,817			6,981
Other assets, net		592			439
Total assets	$	38,614		$	35,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank demand note payable	$	4,300		$	—
Accounts payable		8,101			965
Accrued expenses		678			1,262
Current portion of long term debt		205			—
Total current liabilities		13,284			2,227
Long term debt		1,775			—
Commitments and contingencies		—			—
Stockholders’ equity
Common stock		479			470
Additional paid-in-capital		78,591			76,513
Accumulated deficit		(55,515	)		(43,481	)
Total stockholders’ equity		23,555			33,502
Total liabilities and stockholders’ equity	$	38,614		$	35,729

See accompanying notes.

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)

	Three month periods ended						Nine month periods ended
	September			September			September			September
	30, 2007			30, 2006			30, 2007			30, 2006
Revenue	$	2,691		$	5,278		$	9,921		$	10,449
Cost of goods sold		3,286			3,214			8,809			6,121
Gross profit (loss)		(595	)		2,064			1,112			4,328
Operating expenses:
Sales and marketing		2,144			1,613			6,016			3,183
Research and development		1,590			836			4,037			1,856
Finance and administrative		842			1,444			3,135			3,308
Total operating expenses		4,576			3,893			13,188			8,347
Operating loss		(5,171	)		(1,829	)		(12,076	)		(4,019	)
Interest income (expense):
Interest expense:		(98	)		—			(118	)		(153	)
Interest income		9			304			160			418
Total non-operating income (expense)		(89	)		304			42			265
Net loss		(5,260	)		(1,525	)		(12,034	)		(3,754	)
Less preferred stock dividends:
Cash dividends		—			(162	)		—			(324	)
Non cash dividends		—			—			—			(183	)
Net loss available for common stockholders	$	(5,260	)	$	(1,687	)	$	(12,034	)	$	(4,261	)
Net loss per share basic and diluted	$	(0.11	)	$	(0.04	)	$	(0.25	)	$	(0.12	)
Weighted average common shares outstanding basic and diluted		47,876			41,563			47,390			34,810

See accompanying notes.

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007 (UNAUDITED)
(in thousands, except number of shares)

	Series A
	Convertible
	Preferred Stock				Common Stock				Additional		Accumulated
	Shares		Amount		Shares		Amount		Paid-In Capital		Deficit			Total
Balance at December 31, 2006		—	$	—		47,048,240	$	470	$	76,513	$	(43,481	)	$	33,502
Stock options exercised		—		—		45,291		1		116		—			117
Stock based compensation		—		—		—		—		122		—			122
Net loss		—		—		—		—		—		(3,386	)		(3,386	)
Balance at March 31, 2007		—	$	—		47,093,531	$	471	$	76,751	$	(46,867	)	$	30,355
Stock options exercised		—		—		241,331		2		407		—			409
Stock based compensation		—		—		—		—		275		—			275
Stock warrants exercised		—		—		389,400		3		553		—			556
Net loss		—		—		—		—		—		(3,388	)		(3,388	)
Balance at June 30, 2007		—	$	—		47,724,262	$	476	$	77,986	$	(50,255	)	$	28,207
Stock options exercised		—		—		79,559		1		192		—			193
Stock based compensation		—		—		—		—		268		—			268
Stock warrants exercised		—		—		196,164		2		145		—			147
Net loss		—		—		—		—		—		(5,260	)		(5,260	)
Balance at September 30, 2007		—	$	—		47,999,985	$	479	$	78,591	$	(55,515	)	$	23,555

See accompanying notes.

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2006 (UNAUDITED)
(in thousands, except number of shares)

	Series A
	Convertible Preferred									Additional
	Stock					Common Stock				Paid-In			Accumulated
	Shares			Amount		Shares		Amount		Capital			Deficit			Total
Balance at December 31, 2005		11,200		$	3		29,058,431	$	291	$	40,262		$	(36,209	)	$	4,347
Conversion of preferred stock and accrued dividends to common stock		(290	)		—		145,953		1		1			—			2
Stock options exercised		—			—		33,608		—		57			—			57
Stock based compensation		—			—		—		—		118			—			118
Preferred stock dividends		—			—		—		—		—			(183	)		(183	)
Net loss		—			—		—		—		—			(565	)		(565	)
Balance at March 31, 2006		10,910		$	3		29,237,992	$	292	$	40,438		$	(36,957	)	$	3,776
Conversion of preferred stock and accrued dividends to common stock		(286	)		—		219,713		2		179			—			181
Stock options exercised		—			—		92,164		1		153			—			154
Stock warrants exercised		—			—		480,956		5		470			—			475
Stock based compensation		—			—		—		—		131			—			131
Sale of common stock; net of costs		—			—		11,500,000		115		34,397			—			34,512
Preferred stock dividends		—			—		—		—		—			(162	)		(162	)
Net loss		—			—		—		—		—			(1,665	)		(1,665	)
Balance at June 30, 2006		10,624		$	3		41,530,825	$	415	$	75,768		$	(38,784	)	$	37,402
Stock options exercise		—			—		62,458		1		97			—			98
Stock warrants exercised		—			—		73,536		1		(1	)		—			—
Stock based compensation		—			—		—		—		398			—			398
Preferred stock dividends		—			—		—		—		—			(162	)		(162	)
Net loss		—			—		—		—		—			(1,525	)		(1,525	)
Balance at September 30, 2006		10,624		$	3		41,666,819	$	417	$	76,262		$	(40,471	)	$	36,211

See accompanying notes.

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

	Nine-Month Period			Nine-Month Period
	Ended			Ended
	September 30, 2007			September 30, 2006
Cash flows from operating activities:
Net loss	$	(12,034	)	$	(3,754	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		747			368
Stock based compensation		665			647
(Increase) decrease in assets:
Accounts receivable		7,169			(3,062	)
Interest receivable		86			(88	)
Inventories		(9,816	)		(3,038	)
Prepaid expenses		(130	)		(742	)
Increase (decrease) in liabilities:
Accounts payable		3,921			(1,834	)
Accrued expenses		(584	)		1,871
Net cash used by operating activities		(9,976	)		(9,632	)
Cash flows from investing activities:
Purchases of property and equipment		(9,360	)		(2,439	)
Proceeds from sales of investments		7,249			—
Acquisition of other assets		(161	)		(136	)
Purchases of investments		—			(10,778	)
Net cash used by investing activities		(2,272	)		(13,353	)
Cash flows from financing activities:
Borrowings under demand notes payable		4,300			400
Repayments under demand note payable		—			(3,120	)
Principal payments on long-term debt		(83	)		—
Proceeds from long term debt		2,063			—
Proceeds from options exercised		719			310
Proceeds from sale of common stock; net of costs		—			34,512
Proceeds from warrants exercised		703			475
Preferred cash dividends paid		—			(324	)
Net cash provided by financing activities		7,702			32,253
Net increase (decrease) in cash and cash equivalents		(4,546	)		9,268
Cash and cash equivalents — Beginning of period		4,664			669
Cash and cash equivalents — End of period	$	118		$	9,937

See accompanying notes.

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

     The accompanying consolidated financial statements of Minrad International, Inc. and its wholly owned subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. For further information, refer to the Company’s consolidated financial statements and footnotes as of December 31, 2006 and 2005, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-KSB on March 29, 2007.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

     In September 2006, the FASB issued FIN 48, an interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes and reduces the diversity in current practice associated with the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return by defining a “more-likely-than-not” threshold regarding the sustainability of the position. The Company adopted FIN 48 effective as of January 1, 2007, and the adoption did not have a material impact on the consolidated financial statements.

NOTE 3 — INVENTORIES

     Inventories consist of the following :

	September 30,		December 31,
	2007		2006
Raw materials	$	8,839	$	1,179
Work-in-process		4,308		2,028
Finished goods		1,029		1,153
Total	$	14,176	$	4,360

Reserves for excess and obsolete inventory were $355 thousand and $0 at September 30, 2007 and December 31, 2006, respectively.

NOTE 4 — DEBT

     In 2007, the Commonwealth of Pennsylvania Department of Community and Economic Development approved two loans to the Company for a combined maximum total of $2,150,000.

     On March 30, 2007, the Company closed on a $1,275,000 Machinery and Equipment Loan (MELF) with the Commonwealth of Pennsylvania. The MELF loan is for a seven year term at an interest rate of 3.25% and is to be used for capital improvements at the Company’s Bethlehem, PA facility. The interest rate on the facility is contingent upon the Company meeting certain restrictive covenants, including increased employment levels. The collateral for the loan is select pieces of equipment purchased for the expansion and approved by the Pennsylvania Department of Community and Economic Development.

     On May 1, 2007, the Company entered into a loan with the Pennsylvania Industrial Development Authority (PIDA) for a maximum total of $875,000 with a fifteen year term and a 4.75% interest rate. The interest rate on the facility is contingent upon the Company meeting certain restrictive covenants, including increased employment levels. The collateral for the loan is property owned by the Company in Bethlehem, Pennsylvania.

     Approximate future principle payments are as follows for the years ended December 31 (in thousands):

Year	Commitment
2007	$	50
2008		206
2009		214
2010		222
2011		230
Thereafter		1,058
Total	$	1,980

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — DEBT (CONTINUED)

     On June 15^th, 2007, Minrad International Inc’s wholly owned subsidiary, Minrad, Inc. entered into a line of credit with First Niagara Bank. The line of credit has a maximum principal amount of $5,000,000, collateralized by a blanket security lien against all of the assets of the Company. The line is structured as a Demand Facility to fund the working capital needs of the Company and is available at the discretion of the Company. The Company has the option for interest to accrue at LIBOR plus three percent, or at First Niagara’s Prime Rate. As of September 30, 2007, the outstanding principal balance on the line was $4.300 million and interest was being accrued at 7.75%.

NOTE 5 — EQUITY

     During the nine-month period ended September 30, 2007, the Company issued 366,181 shares of common stock through options exercised by its employees at a weighted average exercise price of $1.96 per share with the net proceeds of $719 thousand. Additionally, the Company issued 585,564 shares of common stock through the exercise of 629,366 warrants, both cash and cashless, at a weighted average exercise price of $1.20 per share with net proceeds of $703 thousand.

NOTE 6 — SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest during the nine-month period ended September 30, 2007 amounted to $118 thousand (compared to $177 thousand in 2006). There was minimal cash paid for income taxes for the nine -month periods ended September 30, 2007 and 2006.

	Nine-Month Periods Ended
	2007		2006
Non-cash investing and financing activities(in thousands):
Property and equipment acquisitions recorded as accounts payable	$	3,215	$	855
Cashless exercise of warrants	$	1	$	1
Preferred stock dividend payable	$	—	$	170
Conversion of preferred stock to common stock	$	—	$	576
Conversion of accrued dividends to common stock	$	—	$	183

NOTE 7 — STOCK OPTIONS

     The Company has adopted an incentive stock option plan, which authorizes the grant up to 7,170,500 options to officers and other employees. Grants under this plan are made at an exercise price of not less than 110% of the market value of common stock at the date of the grant. The options may be exercised in specific increments usually beginning one or two years after the date of grant, and generally expire two to five years from their respective vesting dates or earlier if employment is terminated.

     The compensation cost that has been charged against income for options granted under the plan was $665 thousand for the nine-month period ended September 30, 2007 ($647 thousand for the nine-month period ended September 30, 2006). The impact of this expense was to increase basic and diluted net loss per share from $0.24 to $0.25 for the nine-month period ended September 30, 2007 (the impact increased basic and diluted net loss per share from $0.10 to $0.12 for the nine-month period ended September 30, 2006). The adoption of SFAS 123R did not have an impact on cash flows from operating or financing activities. A deduction is not allowed for income tax purposes until the options are exercised. The amount of this deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded related for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted, the Company has recorded a valuation allowance to reduce gross deferred tax asset to zero. As a result, the nine-month periods ended September 30, 2007 and 2006, there is no income tax expense impact from recording the fair value of options granted.

     Management has valued the options at their date of grant utilizing the Black Scholes Option Pricing Model. The following weighted-average assumptions were utilized in the fair value calculation:

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — STOCK OPTIONS (CONTINUED)

Service Based Options:

	Nine-Month Periods Ended
	September 30,			September 30,
	2007			2006
Expected dividend yield		0	%		0	%
Expected stock price volatility		34	%		34	%
Risk-free interest rate		4.7	%		4.8	%
Expected life of options	3.6 Years			5.0 Years

Performance Based Options:

	Nine-Month Periods Ended
	September 30,		September 30,
	2007		2006
Expected dividend yield		N/A		0	%
Expected stock price volatility		N/A		34	%
Risk-free interest rate		N/A		4.8	%
Expected life of options		N/A	3.0 Years

     A summary of the status of the options granted under the incentive stock option plan is presented below:

Service Based Options:

	Number of					Weighted
	Shares			Weighted		Average		Aggregate
	Subject To			Average		Remaining Life		Intrinsic
	Options			Exercise Price		(Years)		Value
Outstanding as of December 31, 2006		3,470,051		$	2.47
Granted to employees — Nine-month period ended September 30, 2007		1,046,000		$	6.10
Forfeited — Nine-month period ended September 30, 2007		(412,750	)	$	4.63
Exercised — Nine-month period ended September 30, 2007		(356,431	)	$	1.90
Outstanding as of September 30, 2007		3,746,870		$	3.30		3.35	$	6,798
Exercisable as of September 30, 2007		2,224,620		$	2.02		3.22	$	6,170
Performance Based Options:
	Number of					Weighted
	Shares			Weighted		Average		Aggregate
	Subject To			Average		Remaining		Intrinsic
	Options			Exercise Price		Life (Years)		Value
Outstanding as of December 31, 2006		1,480,000		$	4.25
Granted to employees — Nine-month period ended September 30, 2007		—		$	—
Forfeited — Nine-month period ended September 30, 2007		(1,338,875	)	$	4.25
Exercised — Nine-month period ended September 30, 2007		(9,750	)	$	4.25
Outstanding as of September 30, 2007		131,375		$	4.25		1.00	$	71
Exercisable as of September 30, 2007		131,375		$	4.25		1.00	$	71

     The weighted-average grant date fair value of options granted during the nine-month period ended September 30, 2007 was $1.55 ($1.16 for service based options and $0.95 for performance based options during the nine-month period ended September 30, 2006).

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — STOCK OPTIONS (CONTINUED)

The total intrinsic value of options exercised during the nine-month period ended September 30, 2007 was $ 1.380 million ($305 thousand during the nine-month period ended September 30, 2006).

     The following table summarizes the status of the Company’s non-vested options under the incentive stock option plan:

Service Based Options:

	Number of
	Non-vested			Weighted
	Shares Subject To			Average Grant-
	Options			Date Fair Value
Non-vested as of December 31, 2006		1,461,710		$	1.20
Non-vested granted — Nine-month period ended September 30, 2007		1,040,000		$	1.55
Vested — Nine-month period ended September 30, 2007		(572,460	)	$	1.09
Forfeited — Three-month period ended September 30, 2007		(407,000	)	$	1.34
Non-vested as of September 30, 2007		1,522,250		$	1.42

Performance Based Options:

	Number of
	Non-vested			Weighted
	Shares Subject To			Average Grant-
	Options			Date Fair Value
Non-vested as of December 31, 2006		1,338,875		$	0.97
Non-vested granted — Nine-month period ended September 30, 2007		—		$	—
Vested — Nine-month period ended September 30, 2007		—		$	—
Forfeited — Nine-month period ended September 30, 2007		(1,338,875	)	$	0.97
Non-vested as of September 30, 2007		—		$	—

     As of September 30, 2007, there was $1.634 million of total unrecognized compensation cost related to non-vested options granted. That cost is expected to be recognized over a weighted average period of 1.0 years. The total fair value of shares vested during the nine-month period ended September 30, 2007 was $624 thousand ($599 thousand during the nine-month period ended September 30, 2006).

     During the three-month period ended September 30, 2006, the Company granted 1,525,000 performance based options. These options were associated with meeting certain milestone thresholds, of which 1,338,875 were not met by the target date of September 30, 2007 and have been forfeited. Subsequent to September 30, 2007, the Company granted a total of 1,235,000 new performance options with an exercise price of $5.30. The Company has yet to determine if it is probable that any of these performance options would vest over the target period and as such has not determined what if any amount will need to be expensed in future periods.

NOTE 8 — EARNINGS PER SHARE

     If the Company had generated earnings during the nine-month period ended September 30, 2007, approximately 6,955,000 common stock equivalent shares would have been added to the weighted average shares outstanding (approximately 9,923,000 for the nine-month period ended September 30, 2006). These additional shares represent the assumed exercise of common stock options and warrants whose exercise price is less than the average fair value of the Company’s stock during the period. The proceeds of the exercise are assumed to be used to purchase common shares for treasury and the incremental shares are added to the weighted average shares outstanding.

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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — SUBSEQUENT EVENTS

     On Monday, October 22, 2007, Minrad International, Inc. offered the holders of warrants to acquire its Common Stock (at exercise prices between $0.75 and $3.85) an incentive if the holders exercise their warrants for cash during the period from October 26, 2007 to November 26, 2007. A warrant holder who exercises warrants for cash during the period will receive 0.15 additional shares for each $3.85 paid in exercise price.

     As of October 26^th, 2007 the Company had approximately 7.5 million warrants outstanding. If all of these warrants were exercised for cash during the period from October 26, 2007 to November 26, 2007, approximately 634,000 additional shares would be issued.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements, including the notes thereto, included elsewhere in this quarterly report on Form 10-QSB and with our Form 10-KSB filed with the SEC on March 29, 2007.

Company Background

     We operate an interventional pain management business with three focus areas: (1) anesthesia and analgesia, (2) real-time image guidance, and (3) conscious sedation. Our products are sold on a global basis. The anesthesia and analgesia business is currently engaged in the manufacture and sale of generic inhalation anesthetics that are primarily used for human and veterinary surgical interventions. The real-time image guidance business is focused on the commercialization and sale of the SabreSource^TMSystem and the accompanying Light Sabre^TMdisposable procedure instruments. These products have multiple applications in orthopedics, neurosurgery, interventional radiology and anesthesia. We also are developing a drug / drug delivery system for conscious sedation, which, similar to nitrous oxide used in dental surgery, provides a patient with pain relief without loss of consciousness.

Results of Operations — Nine-month period ended September 30, 2007 Compared To Nine-Month Period Ended September 30, 2006.

	Nine-Month Periods Ended
	September 30,			September 30,
(in thousands)	2007			2006
Revenue	$	9,921		$	10,449
Cost of goods sold		8,809			6,121
Gross profit	$	1,112		$	4,328
Gross margin		11	%		41	%

Revenue

     Revenue decreased by $528 thousand or 5%, to $9.921 million for the first nine months of 2007 as compared to $10.449 million for the first nine months of 2006. This decrease is primarily attributed to the low production volume experienced in the third quarter of 2007. Revenues were limited during the first nine months of 2007 due to the manufacturing of both isoflurane and sevoflurane on our isoflurane line (as opposed to separate production lines). In addition we used production time for the processing of customer owned product to extend expiration dating in the second quarter of 2007.

     Sales in the United States were $2.907 million for the first nine months of 2007, down from $6.111 million in the first nine months of 2006. This represented a $3.204 million, or a 52%, decrease from the prior year. International sales grew to $7.014 million for the first nine months of 2007, from $4.338 million in the first nine months of 2006, a $2.676 million increase, or 62%. Sales in the United States decreased between the first nine months of 2006 and the first nine months of 2007 due to customer orders in response to the timing of regulatory approvals in the United States. Sales outside of the United States during the first nine months of 2007 as compared to the first nine months of 2006 increased due to availability of production which was not dedicated for the United States market.

     Our anesthesia and analgesia product line generated 97% of our revenue for the first nine months of 2007 compared to 99% for the first nine months of 2006. In 2007 real-time image guidance sales accounted for the difference as they were approximately $313 thousand.

Gross Profit

     Gross profit decreased by $3.216 million, or 74%, from $4.328 million for the first nine months of 2006 to $1.112 million for the first nine months of 2007. As a percentage of revenues, gross margin decreased from 41% for the first nine months of 2006 to 11% for the first nine months of 2007. This was primarily driven by sub optimal production performance and inventory adjustments arising from the fact that we are undergoing a significant plant expansion at our Bathlehem, PA Facility, and due to the introduction of our new sevoflurane product line. The main production issue for the first nine months of 2007 remained the production of isoflurance and sevoflurane on the Isoflurane API line which caused substantial change over downtime. Also affecting the manufacturing performance was a portion of the production dedicated to producing validation batches for products in development, processing of customer owned product to extend expiration dating, and disruption caused by construction of the new dedicated sevoflurane line. Inventory adjustments of approximately $1.1 million in the third quarter of 2007, were the result of physical inventory adjustments, reserves against our work-in-process inventory due to potential reprocessing of work-in-process material, processing issues which occurred during the third quarter of 2007, purchase price variances, and changes in engineering specifications in our real-time image guidance line.

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	Nine-Month Periods Ended
	September 30,		September 30,
(in thousands)	2007		2006
Operating expenses:
Sales and marketing	$	6,016	$	3,183
Research and development		4,037		1,856
Finance and administrative		3,135		3,308
Total operating expenses	$	13,188	$	8,347

Sales & Marketing

     Sales and marketing expense increased by $2.834 million, or 89%, to $6.016 million for the first nine months of 2007 from $3.183 million for the first nine months of 2006. As a percentage of revenue, sales and marketing expenses increased from 30% of revenue during the first nine months of 2006 to 61% of revenue during the same period in 2007. The primary cause of this growth was due to the creation and expansion of our field sales organization in the second-half of 2006 and into 2007. Growth in the field sales organization resulted in an increase in sales and marketing wages, employer taxes and health benefits of $1.335 million between the two periods. Expenses related to auto, travel and entertainment for sales and marketing increased by $394 thousand period-over-period, reflecting the increase in sales organization headcount. Commissions increased by approximately $404 thousand during the first nine months of 2007 as compared to the first nine months of 2006. Expensing employee options resulted in an increase of $137 thousand non-cash expense in the first nine months of 2007 when compared to the same period in 2006. In the second quarter of 2007, the Company experienced a one-time charge of $122 thousand as a sales and marketing expense as the Company processed product owned by a customer to extend expiration dating to enhance customer satisfaction.

Research & Development

     Research and development expenses for the first nine months of 2007 increased by $2.181 million, or 118%, to $4.037 million from $1.856 million in the nine months of 2006. As a percentage of revenue, these expenses increased from 18% for the first nine months of 2006 to 41% for the first nine months of 2007. The increase between the two periods is due to an expansion of our research and development efforts and headcount related to our anesthesia & analgesia, real-time image guidance, and conscious sedation projects. Growth in the research and development staff between the first nine months of 2007 and the first nine months of 2006 resulted in an increase of $784 thousand in research and development wages, employer taxes and health benefits. Product development costs for new projects increased $794 thousand between the two periods. Costs associated with registration of our products increased $369 thousand in the first nine months of 2007, this cost is primarily due to the increased rate of product registration which occurred during the first nine months of 2007. Expensing of employee options related to research and development resulted in an increase of $146 thousand in the first nine months of 2007 as compared to the same period in 2006.

Finance & Administrative

     Finance and administrative expenses decreased by $173 thousand or 5%, to $3.135 million for the first nine months of 2007 from $3.308 million for the first nine months of 2006. Expensing of employee options related to finance and administration resulted in a decrease of $283 thousand for the first nine months of 2007 as compared to the first nine months of 2006 and a one time expense of $228 thousand which occurred during the third quarter of 2006 related to changes in finance and administrative staff. There was an increase of $399 thousand between periods that was a result of the increased costs related to our new facility in Orchard Park, New York, which was occupied during September of 2006.

	Nine-Month Periods Ended
	September 30,			September 30,
(in thousands)	2007			2006
Non-operating (income) expense:
Interest expense — bank and other	$	(118	)	$	(153	)
Interest Income		160			418
Total non-operating (income) expense	$	42		$	265

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Interest Expense — bank and other

     Cash interest expense decreased by $35 thousand, or 23%, from $(153) thousand in the first nine months of 2006 to $(118) in the first nine months of 2007. This was due to a reduced level of overall debt primarily as a result of the successful fund raising in the second quarter of 2006 through our public offering of our stock. The cash interest expense in the first nine months of 2006 was primarily due to interest on the line of credit with KeyBank. This line of credit with KeyBank was repaid in the second quarter of 2006. The cash interest during the first nine months of 2007 was primarily related to our two development loans with the Commonwealth of Pennsylvania and the line of credit with First Niagara. We anticipate interest costs to grow in future quarters of 2007 as we continue to use our facility with First Niagara Bank and the continued outstanding loans with the Commonwealth of Pennsylvania.

Interest Income

     As a result of cash management and investing of available funds, interest income of $160 thousand was earned during the first nine months of 2007 (as compared to $418 thousand during the first nine months of 2006). The decrease between the two periods was as a result of the decreased cash balances during the first nine months of 2007. We expect the potential for interest income to decrease in the future quarters due to increased capital expenditures as we continue with the expansion of our anesthesia and analgesia facility.

	Nine-Month Periods Ended
	September 30,			September 30,
(in thousands, except per share data)	2007			2006
Net Loss	$	(12,034	)	$	(3,754	)
Less preferred stock dividends — cash		—			(324	)
Less preferred stock dividends — non cash		—			(183	)
Net loss available to common	$	(12,034	)	$	(4,261	)
Net loss per share, basic and diluted	$	(0.25	)	$	(0.12	)
Weighted average common shares outstanding, basic and diluted		47,390,015			34,810,115

Net Loss

     The Net Loss for the first nine months of 2007 was $(12.034) million, an increase of $8.280 million, or 221%, from the net loss of $(3.754) million for the first nine months of 2006. The increase in net loss was primarily caused by the reduction of gross profit between the two periods combined with the increases in our operating expenses as we prepare for future growth.

Dividends

     Dividends incurred during the first nine months of 2006 were $507 thousand. We satisfied the dividends payable at the end of the first quarter of 2006 through the issuance of common stock because our credit agreement with KeyBank restricted the payment of cash dividends at the end of the first quarter of 2006 as we were in violation of certain liquidity covenants contained in the agreement. The terms of our Series A preferred stock require a 15% premium to the dividend payment, when paid in stock. As a result of the 15% premium our dividend payable in the first quarter was $183 thousand. In the second and third quarters of 2006, we satisfied our dividends obligation through paying $324 thousand in cash interest. In December of 2006, the remaining Series A Preferred stock was converted into common shares, eliminating the dividends for the first nine months of 2007.

Liquidity and Capital

     As of September 30, 2007, we had current assets of approximately $19.205 million, including cash of $118 thousand and current liabilities of $13.284 million. As of September 30, 2006, we had current assets of approximately $35.810 million, including cash of $9.937 million, and current liabilities of $4.009 million.

     Net cash used by operating activities increased by $344 thousand, or 4%, to $9.976 million in the first nine months of 2007, from $9.632 million in the first nine months of 2006. The primary use of operating cash flow was a result of our decrease in gross margin, the funding of growth in inventory and as a result of our increase in operating expenses.

     Net cash used by investing activities for the first nine months of 2007 decreased by $11.081 million to $2.272 million from $13.353 million for the first nine months of 2006. The primary uses of cash for investing activities were the purchase of $9.3 million in property, plant, and equipment related to the Bethlehem plant expansion project, and the primary source of cash was the sale of $7.2 million in investments in the first nine months of 2007.

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     Net cash provided by financing activities decreased by $24.5 million, or 76%, to $7.7 million for the first nine months of 2007 from $32.3 million for the first nine months of 2006. The decrease was primarily attributable to proceeds of $34.5 million from the sale of 11.5 million shares of common stock were received in the first nine months of 2006. These shares were sold through an underwritten public offering, at a per share price to the public of $3.25. In the first nine months of 2007 funds were primarily provided through a credit facility with First Niagara Bank and from development loans with the Commonwealth of Pennsylvania.

     We believe we have adequate liquidity and access to capital resources for the next twelve months. We believe we will be able to fund our anticipated working capital needs throughout the next 12 months with additional borrowings. We believe we will be able to obtain these expanded credit facilities in the near term, although these expanded credit facilities are not in place as of September 30, 2007.

     We will need to expend significant capital in order to expand our anesthesia and analgesia market share, develop our real-time image guidance product markets and conscious sedation system, expand our global distribution networks, and complete the expansion of our Bethlehem facility. In addition, if we are successful in expanding the breadth and penetration of our markets, we may need to increase our manufacturing capacity beyond our currently planned expansion. We may also incur unforeseen costs. A critical element of our strategy is to leverage the cash flow we expect to generate from our core anesthesia and analgesia business to develop and commercialize complementary, proprietary interventional pain management products. If our cash flows from operations are insufficient to fund our expected capital needs or our needs are greater than anticipated, we will be required to raise additional funds in the future through private or public sales of equity securities or the incurrence of additional indebtedness.

Forward-Looking Statements

     This quarterly report on Form 10-QSB 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, or the Exchange Act. All statements, other than statements of historical fact, contained in this quarterly report on Form 10-QSB constitute forward-looking statements. In some cases you can identify forward-looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “project,” “potential,” or the negative of these terms and similar expressions intended to identify forward-looking statements.

     Forward-looking statements are based on assumptions and estimates and are subject to risks and uncertainties. Reference is made to the information appearing under the heading “Risk Factors” in Item 1 of our annual report on Form 10-KSB for the year ended December 31, 2006 filed with the SEC on March 29, 2007 (“Risk Factors”), which is incorporated herein by reference. We have identified in the Risk Factors and elsewhere in this Form 10-QSB some of the factors that may cause actual results to differ materially from those expressed or assumed in any of our forward-looking statements. There may be other factors not so identified. You should not place undue reliance on our forward-looking statements. As you read this quarterly report on Form 10-QSB, you should understand that these statements are not guarantees of performance or results. Further, any forward-looking statement speaks only as of the date on which it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect and it is not possible for us to predict all of them. Factors that may cause actual results to differ materially from those expressed or implied by our forward-looking statements include those described in the Risk Factors.

Item 3.Controls and Procedures.

     Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report on Form 10-QSB. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of that date, our disclosure controls and procedures were designed to ensure that the information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms and were effective.

     Changes in Internal Control Over Financial Reporting. There have been no significant changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings.

     Not applicable.

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

     Not applicable.

Item 3.Defaults upon Senior Securities.

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     Not applicable

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

     Not applicable

Item 5.Other Information.

     None.

Item 6.Exhibits and Reports onForm 8-K.

(a)The following exhibits are filed as part of this Quarterly Report on Form 10-QSB:

32.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Exchange Act.
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Exchange Act.
32.1	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

     In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 13, 2007	MINRAD INTERNATIONAL, INC.
	By:	/s/ William H. Burns, Jr.
		William H. Burns, Jr., Chairman and CEO
		(Duly authorized officer and chief executive officer of the Registrant)

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