##### Table of Contents



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, 2006
 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
    
    (I.R.S. Employerincorporation or organization)
    
    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)
 
 þ o
 o þ
  o þ




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##### 



MINRAD INTERNATIONAL, INC.
FORM 10-QSB
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2006
 TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)Consolidated Balance Sheets
at September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations
Three-month periods ended September 30, 2006 and 2005, and
Nine-month periods ended September 30, 2006 and 2005
    
    
    4Consolidated Statement of Changes in Stockholders Equity
Nine-month period ended September 30, 2006
    
    
    5Consolidated Statement of Changes in Stockholders Equity (Deficit)
Nine-month period ended September 30, 2005
    
    
    6Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 2006 and 2005
    
    
    7Notes to Financial Statements
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
    
    
    15ITEM 3. CONTROLS AND PROCEDURES
    
    
    18PART II. OTHER INFORMATION
    
    
    19ITEM 1. LEGAL PROCEEDINGS
    
    
    19ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
    
    
    19ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    19ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    19ITEM 5. OTHER INFORMATION
    
    
    19ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    19SIGNATURES
    
    
    19EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I
 
 Item 1. Financial Statements .
 MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 September 30, 2006
    
    
    December 31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,937,257
    
    
    $
    669,567Investments
    
    
    10,778,262
    
    
    
    Accounts receivable
    
    
    6,521,173
    
    
    
    3,459,275Interest receivable
    
    
    87,879
    
    
    
    Inventories
    
    
    6,898,209
    
    
    
    3,860,442Prepaid expenses and other current assets
    
    
    1,587,606
    
    
    
    961,484Total current assets
    
    
    35,810,386
    
    
    
    8,950,768Property and equipment:Machinery and equipment
    
    
    2,037,960
    
    
    
    1,379,657Computers and software
    
    
    402,393
    
    
    
    220,790Furniture and fixtures
    
    
    598,107
    
    
    
    22,641Leasehold improvements
    
    
    356,213
    
    
    
    Construction in progress
    
    
    1,817,785
    
    
    
    295,1535,212,458
    
    
    
    1,918,241Less accumulated depreciation
    
    
    1,082,936
    
    
    
    849,333Net property and equipment
    
    
    4,129,522
    
    
    
    1,068,908Other assets
    
    
    280,889
    
    
    
    163,732Total assets
    
    $
    40,220,797
    
    
    $
    10,183,408LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank demand note payable
    
    $
    
    
    
    $
    2,720,000Accounts payable
    
    
    1,563,459
    
    
    
    2,541,838Dividends payable
    
    
    169,826
    
    
    
    170,329Accrued expenses
    
    
    2,276,081
    
    
    
    405,388Total current liabilities
    
    
    4,009,366
    
    
    
    5,837,555Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series A convertible preferred stock
    
    
    2,655
    
    
    
    2,800Common stock
    
    
    416,670
    
    
    
    290,585Additional paid-in capital
    
    
    76,262,696
    
    
    
    40,261,861Accumulated deficit
    
    
    (40,470,590
    )
    
    
    (36,209,393
    )Total stockholders equity
    
    
    36,211,431
    
    
    
    4,345,853Total liabilities and stockholders equity
    
    $
    40,220,797
    
    
    $
    10,183,408
  3




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three-Month Periods Ended
    
    
    Nine-Month Periods EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    5,278,130
    
    
    $
    1,423,221
    
    
    $
    10,449,062
    
    
    $
    5,879,147Cost of goods sold
    
    
    3,213,971
    
    
    
    898,448
    
    
    
    6,120,895
    
    
    
    3,380,127Gross profit
    
    
    2,064,159
    
    
    
    524,773
    
    
    
    4,328,167
    
    
    
    2,499,020Operating expenses:Sales and marketing
    
    
    1,613,378
    
    
    
    425,281
    
    
    
    3,183,476
    
    
    
    1,120,584Research and development
    
    
    835,609
    
    
    
    535,640
    
    
    
    1,855,734
    
    
    
    1,304,448Finance and administrative
    
    
    1,444,035
    
    
    
    682,906
    
    
    
    3,308,160
    
    
    
    2,059,208Total operating expenses
    
    
    3,893,022
    
    
    
    1,643,827
    
    
    
    8,347,370
    
    
    
    4,484,240Operating loss
    
    
    (1,828,863
    )
    
    
    (1,119,054
    )
    
    
    (4,019,203
    )
    
    
    (1,985,220
    )Non-operating income (expense):Interest expense:Stockholders and affiliates
    
    
    
    
    
    
    (436,874
    )
    
    
    
    
    
    
    (1,961,429
    )Bank and other
    
    
    
    
    
    
    (3,781
    )
    
    
    (153,373
    )
    
    
    (193,838
    )Interest income
    
    
    303,652
    
    
    
    
    
    
    
    418,023
    
    
    
    Total non-operating
income (expense)
    
    
    303,652
    
    
    
    (440,655
    )
    
    
    264,650
    
    
    
    (2,155,267
    )Net loss
    
    $
    (1,525,211
    )
    
    $
    (1,559,709
    )
    
    $
    (3,754,553
    )
    
    $
    (4,140,487
    )Less preferred stock dividends:Cash dividends
    
    
    (161,879
    )
    
    
    (171,568
    )
    
    
    (323,696
    )
    
    
    (199,174
    )Non cash dividends
    
    
    
    
    
    
    
    
    
    
    (182,948
    )
    
    
    (6,598,549
    )Net loss available for common stockholders
    
    $
    (1,687,090
    )
    
    $
    (1,731,277
    )
    
    $
    (4,261,197
    )
    
    $
    (10,938,210
    )Net loss per share basic and diluted
    
    $
    (0.04
    )
    
    $
    (.06
    )
    
    $
    (0.12
    )
    
    $
    (0.39
    )Weighted average common shares outstanding basic and diluted
    
    
    41,563,229
    
    
    
    28,467,283
    
    
    
    34,810,115
    
    
    
    28,357,762
  4




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 ONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2006 (UNAUDITED)
 Series AConvertible Preferred
    
    
    
    
    
    
    
    
    
    
    AdditionalStock
    
    
    Common Stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at December 31,
2005
    
    
    11,200
    
    
    $
    2,800
    
    
    
    29,058,431
    
    
    $
    290,585
    
    
    $
    40,261,861
    
    
    $
    (36,209,393
    )
    
    $
    4,345,853Conversion of preferred stock
and accrued dividends to common
stock
    
    
    (290
    )
    
    
    (73
    )
    
    
    145,953
    
    
    
    1,460
    
    
    
    518
    
    
    
    
    
    
    
    1,905Stock options exercised
    
    
    
    
    
    
    
    
    
    
    33,608
    
    
    
    336
    
    
    
    57,367
    
    
    
    
    
    
    
    57,703Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,336
    
    
    
    
    
    
    
    118,336Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (182,948
    )
    
    
    (182,948
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (564,708
    )
    
    
    (564,708
    )Balance at March 31, 2006
    
    
    10,910
    
    
    $
    2,727
    
    
    
    29,237,992
    
    
    $
    292,381
    
    
    $
    40,438,082
    
    
    $
    (36,957,049
    )
    
    $
    3,776,141Conversion of preferred stock
and accrued dividends to common
stock
    
    
    (286
    )
    
    
    (72
    )
    
    
    219,713
    
    
    
    2,197
    
    
    
    178,918
    
    
    
    
    
    
    
    181,043Stock options exercised
    
    
    
    
    
    
    
    
    
    
    92,164
    
    
    
    922
    
    
    
    153,322
    
    
    
    
    
    
    
    154,244Stock warrants exercised
    
    
    
    
    
    
    
    
    
    
    480,956
    
    
    
    4,810
    
    
    
    470,190
    
    
    
    
    
    
    
    475,000Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,694
    
    
    
    
    
    
    
    130,694Sale of common stock; net of
costs
    
    
    
    
    
    
    
    
    
    
    11,500,000
    
    
    
    115,000
    
    
    
    34,396,596
    
    
    
    
    
    
    
    34,511,596Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,817
    )
    
    
    (161,817
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,664,634
    )
    
    
    (1,664,634
    )Balance at June 30, 2006
    
    
    10,624
    
    
    $
    2,655
    
    
    
    41,530,825
    
    
    $
    415,310
    
    
    $
    75,767,802
    
    
    $
    (38,783,500
    )
    
    $
    37,402,267Stock options exercised
    
    
    
    
    
    
    
    
    
    
    62,458
    
    
    
    625
    
    
    
    97,781
    
    
    
    
    
    
    
    98,406Stock warrants exercised
    
    
    
    
    
    
    
    
    
    
    73,536
    
    
    
    735
    
    
    
    (735
    )
    
    
    
    
    
    
    Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,848
    
    
    
    
    
    
    
    397,848Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,879
    )
    
    
    (161,879
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,525,211
    )
    
    
    (1,525,211
    )Balance at September 30, 2006
    
    
    10,624
    
    
    $
    2,655
    
    
    
    41,666,819
    
    
    $
    416,670
    
    
    $
    76,262,696
    
    
    $
    (40,470,590
    )
    
    $
    36,211,431
  5




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005 (UNAUDITED)
 Series A Convertible
    
    
    
    
    
    
    
    
    
    
    AdditionalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at
December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    28,019,153
    
    
    $
    280,192
    
    
    $
    20,512,202
    
    
    $
    (24,156,462
    )
    
    $
    (3,364,068
    )Sale of common stock;
net of costs
    
    
    
    
    
    
    
    
    
    
    321,714
    
    
    
    3,217
    
    
    
    431,965
    
    
    
    
    
    
    
    435,182Stock options exercised
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    50
    
    
    
    8,700
    
    
    
    
    
    
    
    8,750Warrants issued with
demand notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    925,188
    
    
    
    
    
    
    
    925,188Warrants issued on
Wachovia guarantee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,937
    
    
    
    
    
    
    
    500,937Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (895,288
    )
    
    
    (895,288
    )Balance at March 31, 2005
    
    
    
    
    
    $
    
    
    
    
    28,345,867
    
    
    $
    283,459
    
    
    $
    22,378,992
    
    
    $
    (25,051,750
    )
    
    $
    (2,389,299
    )Sale of preferred stock;
net of costs
    
    
    11,260
    
    
    
    2,815
    
    
    
    
    
    
    
    
    
    
    
    9,532,054
    
    
    
    
    
    
    
    9,534,869Stock options exercised
    
    
    
    
    
    
    
    
    
    
    118,124
    
    
    
    1,181
    
    
    
    200,911
    
    
    
    
    
    
    
    202,092Stock based compensation
on options extended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,050
    
    
    
    
    
    
    
    121,050Warrants issued on
Wachovia guarantee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479,586
    
    
    
    
    
    
    
    479,586Preferred Dividends:Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,606
    )
    
    
    (27,606
    )Amortization of
beneficial conversion
feature
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,598,549
    
    
    
    (6,598,549
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,685,490
    )
    
    
    (1,685,490
    )Balance at June 30, 2005
    
    
    11,260
    
    
    $
    2,815
    
    
    
    28,463,991
    
    
    $
    284,640
    
    
    $
    39,311,142
    
    
    $
    (33,363,395
    )
    
    $
    6,235,202Stock options exercised
    
    
    
    
    
    
    
    
    
    
    6,583
    
    
    
    66
    
    
    
    9,963
    
    
    
    
    
    
    
    10,029Preferred stock issuance
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91,224
    )
    
    
    
    
    
    
    (91,224
    )Preferred cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (171,568
    )
    
    
    (171,568
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,559,709
    )
    
    
    (1,559,709
    )Balance at September 30,
2005
    
    
    11,260
    
    
    $
    2,815
    
    
    
    28,470,574
    
    
    $
    284,706
    
    
    $
    39,229,881
    
    
    $
    (35,094,672
    )
    
    $
    4,422,730
  6




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine -Month Periods EndedSeptember 30, 2006
    
    
    September 30 , 2005Cash flows from operating activities:Net loss
    
    $
    (3,754,553
    )
    
    $
    (4,140,487
    )Adjustments to reconcile net loss to net cash used by operating
activities:Depreciation and amortization
    
    
    367,934
    
    
    
    131,255Stock based compensation
    
    
    646,878
    
    
    
    121,050Decrease in allowance for doubtful accounts
    
    
    
    
    
    
    (314,078
    )Amortization of note discount
    
    
    
    
    
    
    896,949Warrants issued for guarantee
    
    
    
    
    
    
    980,523(Increase) decrease in assets:Accounts receivable
    
    
    (3,061,898
    )
    
    
    (1,862,637
    )Interest receivable
    
    
    (87,879
    )
    
    
    Inventories
    
    
    (3,037,767
    )
    
    
    (2,303,384
    )Prepaid expenses
    
    
    (742,194
    )
    
    
    (210,291
    )Increase (decrease) in liabilities:Accounts payable
    
    
    (1,833,610
    )
    
    
    (1,940,868
    )Accrued expenses
    
    
    1,870,693
    
    
    
    (110,402
    )Net cash used by operating activities
    
    
    (9,632,397
    )
    
    
    (8,752,370
    )Cash flows from investing activities:Purchases of investments
    
    
    (10,778,262
    )
    
    
    Purchases of property and equipment
    
    
    (2,438,989
    )
    
    
    (232,038
    )Acquisition of other assets
    
    
    (135,412
    )
    
    
    (39,470
    )Net cash used by investing activities
    
    
    (13,352,663
    )
    
    
    (271,508
    )Cash flows from financing activities:Borrowings under demand notes payable
    
    
    400,000
    
    
    
    2,500,000Repayments under demand note payable
    
    
    (3,120,000
    )
    
    
    (1,471,125
    )Proceeds from warrants exercised
    
    
    475,000
    
    
    
    Proceeds from sale of common stock; net of costs
    
    
    34,511,596
    
    
    
    431,965Preferred cash dividends paid
    
    
    (324,199
    )
    
    
    (27,606
    )Principal payments on long-term debt
    
    
    
    
    
    
    (240,567
    )Net repayments to affiliates
    
    
    
    
    
    
    (374,740
    )Net decrease in restricted deposits
    
    
    
    
    
    
    3,675Proceeds from options exercised
    
    
    310,353
    
    
    
    219,574Proceeds from sale of preferred stock; net of costs
    
    
    
    
    
    
    9,440,830Net cash provided by financing activities
    
    
    32,252,750
    
    
    
    10,482,006Net increase in cash and cash equivalents
    
    
    9,267,690
    
    
    
    1,458,128Cash and cash equivalents  beginning of period
    
    
    669,567
    
    
    
    2,930Cash and cash equivalents  end of period
    
    $
    9,937,257
    
    
    $
    1,461,058
  7




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.  BASIS OF PRESENTATION
  NOTE 2. INVESTMENTS
   Gross
    
    
    Grossunrealized
    
    
    unrealizedCost
    
    
    gains
    
    
    losses
    
    
    Fair ValueAvailable-for-sale:Government securites
    
    $
    3,499,005
    
    
    $
    
    
    
    $
    
    
    
    $
    3,499,005Corporate bonds  fixed rate
    
    
    2,962,616
    
    
    
    
    
    
    
    
    
    
    
    2,962,616Taxable auction securities
    
    
    2,600,000
    
    
    
    
    
    
    
    
    
    
    
    2,600,000Certificates of deposit and other
    
    
    1,716,641
    
    
    
    
    
    
    
    
    
    
    
    1,716,641Total available for sale
securities
    
    $
    10,778,262
    
    
    $
    
    
    
    $
    
    
    
    $
    10,778,262
 NOTE 3.  DEMAND NOTE PAYABLE
  8




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4.  STOCKHOLDERS EQUITY
     NOTE 5.  STOCK OPTIONS
   9




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5.  STOCK OPTIONS (CONTINUED)
     Nine-Month Periods EndedSeptember 30,
    
    
    September 30,Service Based Options
    
    2006
    
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    34
    %
    
    
    34
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    4.0
    %Expected life of options
    
    5.0 Years
    
    7.0 Years
 10




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5.  STOCK OPTIONS (CONTINUED)
 Nine-Month Periods EndedSeptember 30,
    
    
    September 30,Performance Based Options
    
    2006
    
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    34
    %
    
    
    0
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    0
    %Expected life of options
    
    3.0 Years
    
    0.0 Years
  WeightedNumber of
    
    Weighted
    
    Average
    
    AggregateShares Subject
    
    Average
    
    Remaining
    
    IntrinsicService Based Options
    
    To Options
    
    Price Exercise
    
    Life (Years)
    
    ValueOutstanding as of December 31, 2005
    
    
    2,906,809
    
    
    $
    2.04Granted to employees  Nine-month period
ended September 30, 2006
    
    
    1,176,000
    
    
    $
    3.63Forfeited  Nine-month period ended
September 30, 2006
    
    
    (552,328
    )
    
    $
    3.79Exercised  Nine-month period ended
September 30, 2006
    
    
    (188,230
    )
    
    $
    1.65Outstanding as of September 30, 2006
    
    
    3,342,251
    
    
    $
    2.33
    
    
    
    4.24
    
    
    $
    5,782,567Exercisable as of September 30, 2006
    
    
    1,903,080
    
    
    $
    1.61
    
    
    
    3.83
    
    
    $
    5,539,214
 WeightedNumber of
    
    Weighted
    
    Average
    
    AggregateShares Subject
    
    Average
    
    Remaining
    
    IntrinsicPerformance Based Options
    
    To Options
    
    Price Exercise
    
    Life (Years)
    
    ValueOutstanding as of December 31, 2005
    
    
    
    
    
    $
    0.00Granted to employees  Nine-month period
ended September 30, 2006
    
    
    1,525,000
    
    
    $
    4.25Forfeited  Nine-month period ended
September 30, 2006
    
    
    
    
    
    $
    0.00Exercised  Nine-month period ended
September 30, 2006
    
    
    
    
    
    $
    0.00Outstanding as of September 30, 2006
    
    
    1,525,000
    
    
    $
    4.25
    
    
    
    2.87
    
    
    $Exercisable as of September 30, 2006
    
    
    141,125
    
    
    $
    4.25
    
    
    
    2.00
    
    
    $
  11




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5.  STOCK OPTIONS (CONTINUED)
  Weighted-Number of Non-
    
    Averagevested Shares
    
    Grant-DateService Based Options
    
    Subject To Options
    
    Fair ValueNon-vested as of December 31, 2005
    
    
    1,683,910
    
    
    $
    0.70Non-vested granted  nine-month period ended
September 30, 2006
    
    
    1,176,000
    
    
    $
    1.16Vested nine-month period ended September 30, 2006
    
    
    (947,572
    )
    
    $
    0.49Forfeited nine-month period ended September 30, 2006
    
    
    (473,167
    )
    
    $
    1.58Non-vested as of September 30, 2006
    
    
    1,439,171
    
    
    $
    1.04
 Weighted-Number of Non-
    
    Averagevested Shares
    
    Grant-DatePerformance Based Options
    
    Subject To Options
    
    Fair ValueNon-vested as of December 31, 2005
    
    
    
    
    
    $
    0.00Non-vested granted  nine-month period ended
September 30, 2006
    
    
    1,525,000
    
    
    $
    0.95Vested nine-month period ended September 30, 2006
    
    
    (141,125
    )
    
    $
    0.98Forfeited nine-month period ended September 30, 2006
    
    
    
    
    
    $
    0.00Non-vested as of September 30, 2006
    
    
    1,383,875
    
    
    $
    .97
   Nine-MonthPeriod EndedSeptember 30, 2005Net loss available for common stock holders, as reported
    
    $
    (10,938,210
    )Stock based compensation included in the determination of net loss
    
    $
    121,050Total stock based employee compensation expense determined under
fair value method for all awards (SFAS 123R)
    
    $
    (266,549
    )Net loss available for common stock holders, pro forma
    
    $
    (11,083,709
    )Net loss per share, basic and diluted, as reported
    
    $
    (0.39
    )Net loss per share, basic and diluted, pro forma
    
    $
    (0.39
    )
 12




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6.  SUPPLEMENTAL CASH FLOW INFORMATION
  Nine-Month PeriodsEndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Non-cash investing and financing activities:Property and equipment acquisitions recorded as accounts payable
    
    $
    855,228
    
    
    $
    Preferred stock dividends payable
    
    $
    169,826
    
    
    $
    171,568Conversion of preferred stock to common stock
    
    $
    576,000
    
    
    $
    Conversion of accrued dividends to common stock
    
    $
    182,947
    
    
    $
    Cashless exercise of warrants
    
    $
    765
    
    
    $
    Non cash dividends
    
    $
    
    
    
    $
    6,598,549Note discount for value of detachable warrants granted with demand notes
    
    $
    
    
    
    $
    925,188
 NOTE 7.  EARNINGS PER SHARE
  NOTE 8.  RELATED PARTY TRANSACTIONS
   13




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8.  RELATED PARTY TRANSACTIONS (CONTINUED)
       NOTE 9  OPERATING LEASE
  NOTE 10  CUSTOMER CONCENTRATION
  14




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##### Table of Contents



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
  Company Background
 TM TM
 Results Of Operations  Nine-Month Period Ended September 30, 2006 Compared To Nine-Month
Period Ended September 30, 2005.
 Nine-Month Periods EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Revenue
    
    $
    10,449,062
    
    
    $
    5,879,147Cost of goods sold
    
    
    6,120,895
    
    
    
    3,380,127Gross profit
    
    $
    4,328,167
    
    
    $
    2,499,020Gross margin
    
    
    41
    %
    
    
    43
    %
 Revenue
    Gross Profit
  15




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##### Table of Contents



Nine-Month Periods EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Operating expenses:Sales and marketing
    
    $
    3,183,476
    
    
    $
    1,120,584Research and development
    
    
    1,855,734
    
    
    
    1,304,448Finance and administrative
    
    
    3,308,160
    
    
    
    2,059,208Total operating expenses
    
    $
    8,347,370
    
    
    $
    4,484,240
 Sales & Marketing
  Research & Development
  Finance & Administration
  Nine-Month Periods EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Non-operating (income) expense:Interest expense  stockholders and affiliates
    
    $
    
    
    
    $
    (1,961,429
    )Interest expense  bank and other
    
    
    (153,373
    )
    
    
    (193,838
    )Interest Income
    
    
    418,023
    
    
    
    Total non-operating (income) expense
    
    $
    264,650
    
    
    $
    (2,155,267
    )
 Interest Expense  stockholders and affiliates
  Interest Expense  bank and other
  16




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##### Table of Contents



Interest Income
  Nine-Month Periods EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Net Loss
    
    $
    (3,754,553
    )
    
    $
    (4,140,487
    )Less preferred stock dividends  cash
    
    
    (323,696
    )
    
    
    (199,174
    )Less preferred stock dividends  non cash
    
    
    (182,948
    )
    
    
    (6,598,549
    )Net loss available to common
    
    $
    (4,261,197
    )
    
    $
    (10,938,210
    )Net loss per share, basic and diluted
    
    $
    (0.12
    )
    
    $
    (0.39
    )Weighted average common shares outstanding, basic and diluted
    
    
    34,810,115
    
    
    
    28,357,762
 Net Loss
  Dividends
  Liquidity and Capital
     17




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##### Table of Contents



Forward-Looking Statements
   
 Item 3. Controls and Procedures .
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 18




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings .
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds.
  
 Item 3. Defaults upon Senior Securities .
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits and Reports on Form 8-K .
 The following exhibits are filed as part of this Quarterly Report on Form 10-QSB
    
 Signatures
  Date: November 6, 2006
    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) 19