**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

| **x****** **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                   |
| **For the  quarterly period ended March 31, 2007**                                                           |
| ** **                                                                                                   |
| **OR**                                                                                                       |
| ** **                                                                                                   |
| **o****** **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 000-25995**

**NEXTERAENTERPRISES, INC.**

(Exactname of registrant as specified in its charter)

| **Delaware**                     |   | **95-4700410**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

 

**14320 Arminta Street, Panorama City, California, 91402**

(Addressof principal executive office, including zip code)

**(818) 902-5537**

 (Registrant’s telephone number, including areacode)

Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. YES x NO o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Exchange Act Rule 12b-2.

Large accelerated filer  o  Accelerated filer  o    Non-accelerated filer  x

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

|  | YES o  NO x |
|--|-------------|

 

Asof May 11, 2007, 38,492,851sharesof registrant’s Class A Common Stock, $0.001 par value, were outstanding and3,844,200 shares of registrant’s Class B Common Stock, $0.001 par value, wereoutstanding.

 

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**NEXTERA ENTERPRISES, INC.Quarterly Report on Form 10-Qfor the Quarter Ended March 31, 2007**

**INDEX**
| PART I. FINANCIAL  INFORMATION |   |                                                                                                 |
|--------------------------------|--------|------------------------------------------------------------------------------------------------------|
|                           |   |                                                                                                 |
| Item 1.                        |   | Financial Statements.                                                                                |   |   |
|                           |   |                                                                                                 |   |   |
|                           |   | Condensed Consolidated Balance Sheets as of March 31,  2007  and December 31, 2006                   |   |   |
|                           |   |                                                                                                 |   |   |
|                           |   | Condensed Consolidated Statements of Operations for  the  Three Months Ended March 31, 2007 and 2006 |   |   |
|                           |   |                                                                                                 |   |   |
|                           |   | Condensed Consolidated Statements of Cash Flows for  the  Three Months Ended March 31, 2007 and 2006 |   |   |
|                           |   |                                                                                                 |   |   |
|                           |   | Notes to Unaudited Condensed Consolidated Financial  Statements                                      |   |   |
|                           |   |                                                                                                 |   |   |
| Item 2.                        |   | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations.        |   |   |
|                           |   |                                                                                                 |   |   |
| Item 3.                        |   | Quantitative  and Qualitative Disclosures About Market Risk.                                         |   |   |
|                           |   |                                                                                                 |   |   |
| Item 4.                        |   | Controls and  Procedures.                                                                            |   |   |
|                           |   |                                                                                                 |   |   |
| PART  II. OTHER INFORMATION    |   |                                                                                                 |
|                           |   |                                                                                                 |
| Item 1A.                       |   | Risk  Factors.                                                                                       |   |   |
|                           |   |                                                                                                 |   |   |
| Item 6.                        |   | Exhibits.                                                                                            |   |   |
|                           |   |                                                                                                 |   |   |
|                           |   | Signatures                                                                                           |   |   |
|                           |   |                                                                                                 |
| Exhibit 31.1                   |   |                                                                                                 |
| Exhibit 31.2                   |   |                                                                                                 |
| Exhibit 32.1                   |   |                                                                                                 |
| Exhibit 32.2                   |   |                                                                                                 |

 

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**PART I      FINANCIAL INFORMATION**

**ITEM 1.      FINANCIALSTATEMENTS.**

**NexteraEnterprises, Inc.**

**Condensed Consolidated Balance Sheets**

**(Amounts in thousands, exceptshare amounts)**
| ** **                                                                                                                                                                                                                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                                 |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                                                            |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                 |       | $                        | 434        |                        | $          | 597 |   |
| Accounts  receivable, net of allowances for customer deductions and doubtful accounts  of $2,500 at March 31, 2007 and $2,800 at December 31, 2006                                                                         |       | —                   |       | —                      |       |
| Inventories                                                                                                                                                                                                                |       | 2,186                    |       | 2,595                       |       |
| Due from  supplier                                                                                                                                                                                                         |       | 24                       |       | 127                         |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                 |       | 1,869                    |       | 260                         |       |
| Total current assets                                                                                                                                                                                                       |       | 4,513                    |       | 3,579                       |       |
|                                                                                                                                                                                                                       |       |                     |       |                        |       |
| Property and equipment,  net                                                                                                                                                                                               |       | 277                      |       | 284                         |       |
| Goodwill                                                                                                                                                                                                                   |       | 8,969                    |       | 10,969                      |       |
| Intangible assets, net                                                                                                                                                                                                     |       | 12,814                   |       | 12,827                      |       |
| Other assets                                                                                                                                                                                                               |       | 382                      |       | 484                         |       |
| Total assets                                                                                                                                                                                                               |       | $                        | 26,955     |                        | $          | 28,143 |   |
|                                                                                                                                                                                                                       |       |                     |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                             |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                                                       |       |                     |       |                        |       |
| Accounts payable  and accrued expenses                                                                                                                                                                                     |       | $                        | 4,324      |                        | $          | 4,364 |   |
| Current portion  of long-term debt                                                                                                                                                                                         |       | 250                      |       | —                      |       |
| Total current  liabilities                                                                                                                                                                                                 |       | 4,574                    |       | 4,364                       |       |
|                                                                                                                                                                                                                       |       |                     |       |                        |       |
| Long-term debt                                                                                                                                                                                                             |       | 11,468                   |       | 11,718                      |       |
|                                                                                                                                                                                                                       |       |                     |       |                        |       |
| Deferred taxes                                                                                                                                                                                                             |       | 296                      |       | 236                         |       |
| Other long-term  liabilities                                                                                                                                                                                               |       | 1,334                    |       | 1,334                       |       |
| Commitments and  contingencies                                                                                                                                                                                             |       | —                   |       | —                      |       |
| Stockholders’ equity:                                                                                                                                                                                                 |       |                     |       |                        |       |
| Preferred Stock,  $0.001 par value, 10,000,000 shares authorized, 600,000 authorized shares designated  Series A, 53,505 and 52,429 Series A issued and outstanding at March 31, 2007  and December 31, 2006, respectively |       | 5,351                    |       | 5,243                       |       |
| Class A Common  Stock, $0.001 par value, 95,000,000 shares authorized, 38,492,851 shares  issued and outstanding at March 31, 2007 and December 31, 2006                                                                   |       | 38                       |       | 38                          |       |
| Class B Common  Stock, $0.001 par value, 4,300,000 shares authorized, 3,844,200 shares issued  and outstanding at March 31, 2007 and December 31, 2006                                                                     |       | 4                        |       | 4                           |       |
| Additional  paid-in capital                                                                                                                                                                                                |       | 165,183                  |       | 165,218                     |       |
| Accumulated  deficit                                                                                                                                                                                                       |       | (161,293                 | )          | (160,012                    | )          |
| Total stockholders’  equity                                                                                                                                                                                           |       | 9,559                    |       | 10,491                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                            |       | $                        | 26,955     |                        | $          | 28,143 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

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**Nextera Enterprises, Inc.**

**Condensed Consolidated Statements of Operations**

**(Amountsin thousands, except share amounts)**

**(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                           |       |                                             |       |   |   |
| Net sales                                                      |       | $                                                | 2,434      |   | $ | 1,096 |   |
| Cost of sales                                                  |       | 1,125                                            |       | 540 |   |
| Gross profit                                                   |       | 1,309                                            |       | 556 |   |
|                                                           |       |                                             |       |   |   |
| Selling, general  and administrative expenses                  |       | 1,997                                            |       | 1,212 |   |
| Amortization of  intangible assets                             |       | 257                                              |       | 31 |   |
| Operating loss                                                 |       | (945                                             | )          | (687 | ) |
|                                                           |       |                                             |       |   |   |
| Interest income                                                |       | 6                                                |       | 125 |   |
| Interest expense                                               |       | (282                                             | )          | (74 | ) |
| Loss from  continuing operations before income taxes           |       | (1,221                                           | )          | (636 | ) |
|                                                           |       |                                             |       |   |   |
| Provision for  income taxes                                    |       | 60                                               |       | 29 |   |
| Net loss                                                       |       | (1,281                                           | )          | (665 | ) |
|                                                           |       |                                             |       |   |   |
| Preferred stock  dividends                                     |       | (108                                             | )          | (84 | ) |
| Net loss  applicable to common stockholders                    |       | $                                                | (1,389     | ) | $ | (749 | ) |
|                                                           |       |                                             |       |   |   |
| Net loss per  common share, basic and diluted                  |       |                                             |       |   |   |
| Continuing operations                                          |       | $                                                | (0.03      | ) | $ | (0.02 | ) |
|                                                           |       |                                             |       |   |   |
| Weighted average common  shares outstanding, basic and diluted |       | 42,337                                           |       | 35,940 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

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**Nextera Enterprises, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(Amounts in thousands; unaudited)**
| ** **                                                                   | ** ** | **Three Months Ended  March 31,**                                                                 | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                                                                         | ** ** | **2006** | ** ** |
| **Operating  activities**                                                    |       |                                                                                                             |       |   |   |
| Net loss                                                                     |       | $                                                                                                                | (1,281     | ) | $ | (665 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                                                                             |       |   |   |
| Depreciation                                                                 |       | 14                                                                                                               |       | 12 |   |
| Amortization of intangible assets                                            |       | 257                                                                                                              |       | 31 |   |
| Provision for allowances and returns                                         |       | (91                                                                                                              | )          | — |   |
| Inventory writedown                                                          |       | 21                                                                                                               |       | — |   |
| Deferred taxes                                                               |       | 60                                                                                                               |       | — |   |
| Stock based compensation                                                     |       | 81                                                                                                               |       | 40 |   |
| Change in operating assets and liabilities:                                  |       |                                                                                                             |       |   |   |
| Accounts receivable                                                          |       | 194                                                                                                              |       | 238 |   |
| Inventory                                                                    |       | 388                                                                                                              |       | 341 |   |
| Prepaid expenses and other assets                                            |       | (13                                                                                                              | )          | (205 | ) |
| Accounts payable and accrued expenses                                        |       | (40                                                                                                              | )          | 238 |   |
| Net cash  provided by (used in) operating activities                         |       | (410                                                                                                             | )          | 30 |   |
|                                                                         |       |                                                                                                             |       |   |   |
| **Investing  activities**                                                    |       |                                                                                                             |       |   |   |
| Cash from  acquisition escrow                                                |       | 500                                                                                                              |       | (22,951 | ) |
| Purchase of  licensing agreement                                             |       | (246                                                                                                             | )          | — |   |
| Purchase of  fixed assets                                                    |       | (7                                                                                                               | )          | — |   |
| Net cash (used  in) provided by investing activities                         |       | 247                                                                                                              |       | (22,951 | ) |
|                                                                         |       |                                                                                                             |       |   |   |
| **Financing  activities**                                                    |       |                                                                                                             |       |   |   |
| Borrowings under  revolving credit facility                                  |       | —                                                                                                           |       | 3,000 |   |
| Borrowings under  term note                                                  |       | —                                                                                                           |       | 10,000 |   |
| Payment of note  acquired in acquisition                                     |       | —                                                                                                           |       | (1,000 | ) |
| Payment of debt  issuance costs                                              |       | —                                                                                                           |       | (480 | ) |
| Net cash  provided by financing activities                                   |       | —                                                                                                           |       | 11,520 |   |
|                                                                         |       |                                                                                                             |       |   |   |
| Net decrease in cash and cash equivalents                                    |       | (163                                                                                                             | )          | (11,401 | ) |
|                                                                         |       |                                                                                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 597                                                                                                              |       | 15,043 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                                                                                | 434        |   | $ | 3,642 |   |
|                                                                         |       |                                                                                                             |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                         |       |                                                                                                             |       |   |   |
| Cash paid during the  period for:                                            |       |                                                                                                             |       |   |   |
| Interest                                                                     |       | $                  282 |       | — |   |
| Income Taxes                                                                 |       | —                                                                                                           |       | — |   |

 

SeeNotes to Condensed Consolidated Financial Statements

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**NEXTERA ENTERPRISES, INC.**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**1.****    ****Basis of Presentation**

Theaccompanying unaudited condensed consolidated financial statements of NexteraEnterprises, Inc. (“Nextera” or the “Company”) for the three months ended March31, 2007 and 2006 have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. Operating results for the three-month period ended March 31, 2007 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2007.

Thecondensed consolidated balance sheet as of December 31, 2006 has been derivedfrom the audited financial statements at that date but does not include all ofthe information and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements.

Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto, together withmanagement’s discussion and analysis of financial condition and results ofoperations, contained in the Company’s Annual Report on Form 10-K filed by theCompany with the Securities and Exchange Commission on April 17, 2007.

OnMarch 9, 2006, the Company, through a wholly-owned subsidiary, acquiredsubstantially all of the assets of Jocott Enterprises, Inc. (“Jocott”),formerly Woodridge Labs, Inc. Subsequently, the wholly owned subsidiary wasrenamed Woodridge Labs, Inc.  As usedherein, the term “Woodridge” refers to Jocott for all periods prior to March 9,2006 and to Nextera’s wholly owned subsidiary Woodridge Labs, Inc. from andafter March 9, 2006.  Prior to theacquisition of the Woodridge assets, Nextera had no business operations for theperiod from November 29, 2003 through March 8, 2006.  Woodridge’s financial results have only beenincluded for the period subsequent to March 9, 2006.

Woodridge,Nextera’s sole operating business, is an independent developer and marketer ofbranded consumer products that offer solutions to niche personal careneeds.  Brands sold by Woodridge includeVita-K Solution, DermaFreeze 365TM, Ellin LaVar TexturesTM, Heavy DutyTM, Virtual laserTM, Pssssst®, Bath LoungeTM, Vita-C2TM, firminol-10® and Turboshave®.

MounteLLC (successor to Krest, LLC, Knowledge Universe LLC and Knowledge Universe,Inc.) controls a majority of the voting power of the Company’s equitysecurities through its ownership of the Company’s Class A Common Stock, Class BCommon Stock and Series A Cumulative Preferred Stock.

Theaccompanying condensed consolidated financial statements have been prepared onthe basis that the Company is a going concern. In March 2007, the Company voluntarily recalled certain products in itsDermaFreeze365 product line, resulting in adjustments to accounts receivableand inventory of $2.5 million and $.2 million, respectively, through March 31,2007.  Primarily as a result of these factors, the Company negotiatedrevisions to its financial covenants for 2007 (see footnote 8) with itslender.  The Company was successful in revising its financial covenants toprovide for the deferral of certain covenants until 2008, as well as reducingthe thresholds of other covenants that remain in effect throughout 2007. Further, the Company entered into various agreements with certain of itsshareholders to obtain $4.5 million in additional subordinated financing whichwas funded during March and April 2007 (see footnote 8).  The Company’sforecast for 2007 anticipates full compliance with all required financialcovenants throughout 2007; however management of the Company can provide noassurances that such compliance can be maintained.  Should future eventsoccur that are not now anticipated, the Company could be in violation of someor all of its covenants in 2007.

**2. ****  ****Significant AccountingPolicies**

***Principles of Consolidation***

The condensed consolidated financialstatements include the accounts of the Company and its subsidiaries.Significant intercompany accounts and transactions have been eliminated in theconsolidation.

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***Use of Estimates***

The preparation of condensedconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported period.Actual results could differ from those estimates.

***Cash and Cash Equivalents***

Cash and cash equivalents consist of cash on hand anddemand deposit accounts. The Company considers all highly liquid investmentswith maturity of three months or less when purchased to be cash equivalents.Cash equivalents are stated at cost, which approximates market value.

***Concentration of Credit Risk***

Financial instruments that potentially subject theCompany to concentrations of credit risk consist principally of cash and cashequivalents and accounts receivable. The Company places its cash and cashequivalents in various financial institutions with high credit ratings and, bypolicy, limits the amount of credit exposure to any one financial institution.

Concentrations of credit risk with respect to accountsreceivable exist due to a limited number of customers that make up the Company’scustomer base. Three customers accounted for 57% of gross accounts receivableas of March 31, 2007. The Company performs ongoing credit evaluations ofits customers and generally does not require collateral. The Company maintainsallowances for doubtful accounts for specifically identified estimated lossesresulting from the inability of its customers to make required payments. Grosssales (net sales prior to customer deductions) to the Company’s three largestcustomers made up 35% of total gross sales for the three month period endingMarch 31, 2007.

***Revenue Recognition,******Allowances for Sales Returnsand Markdowns***

Sales are recognized when title andrisk of loss transfer to the customer, the sales price is fixed or determinableand the collection of the resulting receivable is probable. Sales are recordednet of estimated returns and other allowances. The provision for sales returnsrepresents management’s estimate of future returns based on historicalexperience and considering current external factors and market conditions.

The sales-returnaccrual is a subjective critical estimate that has a direct impact on reportednet sales.  As is customary in the industry, the Company grants certain ofits customers, subject to authorization and approval, the right to eitherreturn products or to receive a markdown allowance for certain promotionalproduct. Upon sale, the Company records a provision for product returns andmarkdowns estimated based on historical and projected experience, economictrends and changes in customer demand. There is considerable judgment used inevaluating the factors influencing the allowance for returns and markdowns, andtherefore additional allowances in any particular period may be needed.  The types of known or anticipated events thatthe Company has considered, and will continue to consider, include, but are notlimited to, the solvency of its customers, store closings by retailers, changesin the retail environment, including mergers and acquisitions, and the Company’sdecision to continue or support new and existing products. Actual sales returnsand markdowns may differ significantly, either favorably or unfavorably, fromthese estimates.

***Advertising, Promotion andMarketing***

All costs associated with advertising, promoting andmarketing (including promotions, direct selling, co-op advertising and mediaplacement) of Company products are expensed as incurred and charged to selling,general and administrative expense.  Forthe three months ended March 31, 2007 and 2006, advertising and promotionexpenses were $0.4 million and $0.3 million, respectively.

***Shipping and Handling Costs***

Substantiallyall costs associated with shipping and handling of products to customers areincluded in selling, general and administrative expense. For the three monthsended March 31, 2007 and 2006, shipping and handling costs were approximately$0.06 million and $0.04 million, respectively.

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***Inventories***

Inventories are stated at the lower of cost (using the first-in,first-out method) or market value.

***Provisions for Inventory Obsolescence***

The Companyrecords a provision for estimated obsolescence of inventory. These estimatesconsider the cost of inventory, forecasted demand, the estimated market value,the shelf life of the inventory and historical experience. If there are changesto these estimates, additional provisions for inventory obsolescence may benecessary.

***Propertyand Equipment***

Property and equipment are stated at cost.  Depreciation of property and equipment isprovided on the straight line method based on the estimated lives of theassets.  The principal estimated usefullives used in computing depreciation and amortization are as follows:
| Equipment and vehicles  |   | 3 - 5 years |
|-------------------------|--------|-------------|
| Furniture and  fixtures |   | 3 - 5 years |
| Software                |   | 3 years     |

 

Leasehold improvements are amortizedover the shorter of the life of the lease or the estimated useful life of theasset.

***Accounting for Acquisitions andIntangible Assets***

TheCompany has accounted for its acquisitions under the purchase method ofaccounting for business combinations. Under the purchase method of accounting,the cost, including transaction costs, are allocated to the underlying netassets, based on their respective estimated fair values. The excess of thepurchase price over the estimated fair values of the net assets acquired isrecorded as goodwill.

The judgments made in determining the estimated fairvalue and expected useful lives assigned to each class of assets andliabilities acquired can significantly affect net income. For example,different classes of assets will have useful lives that differ and the usefullife of property, plant and equipment acquired will differ substantially fromthe useful life of brand licenses and trademarks. Consequently, to the extent alonger-lived asset is ascribed greater value under the purchase method than a shorter-livedasset, net income in a given period may be higher.

Determiningthe fair value of certain assets and liabilities acquired is judgmental innature and often involves the use of significant estimates and assumptions. Oneof the areas that requires more judgment is determining the fair value anduseful lives of intangible assets. To assist in this process, the Company oftenobtains appraisals from independent valuation firms for certain intangibleassets.

TheCompany’s intangible assets primarily consist of customer relationships,non-compete covenants, exclusive brand licenses and trademarks. The value ofthe intangible assets, including customer relationships and other intangibles,is exposed to future adverse changes if the Company experiences declines inoperating results or experience significant negative industry or economictrends. The Company periodically reviews intangible assets, at least annuallyor more often as circumstances dictate, for impairment and the useful lifeassigned using the guidance of applicable accounting literature.

***Long-Lived Assets***

TheCompany reviews for the impairment of long-lived assets to be held and usedwhenever events or changes in circumstances indicate that the carrying amountof such assets may not be fully recoverable. Measurement of an impairment lossis based on the fair value of the asset compared to its carrying value.Long-lived assets to be disposed of are reported at the lower of carryingamount or fair value less costs to sell.

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***DeferredFinancing Costs***

Companyhas incurred costs in connection with its credit agreement.  Costs directly associated with financings arecapitalized as deferred financing costs and are amortized over the weightedaverage life of the long-term credit facility

***Basicand Diluted Earnings Per Common Share***

The Company presents two earnings pershare amounts: the basic earnings per common share and the diluted earnings percommon share. Basic earnings per common share includes only the weightedaverage shares outstanding and excludes any dilutive effects of options,warrants and convertible securities. The dilutive effects of options, warrantsand convertible securities are added to the weighted average shares outstandingin computing diluted earnings per common share. For the three-month periodsended March 31, 2007 and 2006, basic and diluted earnings per common share arethe same due to the antidilutive effect of potential common shares outstanding.

***IncomeTaxes***

The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007.  The impact of adopting FIN 48 was notmaterial to the Company’s financial position or results of operations.  Total unrecognized tax benefits as of January1, 2007 were $0.4 million, excluding the federal benefits on state taxpositions and federal and state benefits on interest which have been recordedas deferred income taxes. 

The unrecognizedtax benefits are subject to examination through September 2007. Tax years 2003through 2006 and 2002 through 2006 are subject to examination by the federaland state taxing authorities, respectively. There are no income tax examinations currently in process.

We recognizeinterest and penalties related to uncertain tax positions in income tax expensewhich were insignificant for the three months ended March 31, 2007.

For the threemonths ended March 31, 2007, there were no material changes from the date of adoption.

***Share-Based Compensation***

All share-based paymentsto employees, including the grant of employee stock options, are recognized inthe condensed consolidated financial statements based on their fair value.Compensation cost for awards that vest will not be reversed if the awardsexpire without being exercised. The fair value of stock options is determinedusing the Black-Scholes option-pricing model. Compensation costs for awards areamortized using the straight-line method. Option pricing model inputassumptions such as expected term, expected volatility and risk-free interestrate impact the fair value estimate. Further, the forfeiture rate impacts theamount of aggregate compensation. These assumptions are subjective andgenerally require significant analysis and judgment to develop. When estimatingfair value, some of the assumptions are based on or determined from externaldata and other assumptions are derived from historical experience. Theappropriate weight to place on historical experience is a matter of judgment,based on relevant facts and circumstances.

The Company relies onits historical experience and post-vested termination activity to provide datafor estimating its expected term for use in determining the fair value of itsstock options. The Company currently estimates its stock volatility byconsidering its historical stock volatility experience and other key factors.The risk-free interest rate is the 

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implied yield currentlyavailable on U.S. Treasury zero-coupon issues with a remaining term equal tothe expected term used as the input to the Black-Scholes model. The Companyestimates forfeitures using its historical experience. The estimates offorfeitures will be adjusted over the requisite service period based on theextent to which actual forfeitures differ, or are expected to differ, fromtheir estimates.

***Comprehensive Loss***

Other than the net loss incurred during the three-month periods endedMarch 31, 2007 2006, there were no additional material other components ofcomprehensive loss.

***Recently Issued Accounting Pronouncements***

In September 2006, the FASB issuedStatement of Financial Accounting Standards (“SFAS”) Statement No. 157, “*Fair Value Measurements,”*(“SFAS 157”).SFAS 157 establishes a single authoritative definition of fair value, setsout a framework for measuring fair value, and expands on required disclosuresabout fair value measurement. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those years. Early adoption is permitted. The Companyplans to adopt SFAS No. 157 in the first quarter of its 2008 fiscalyear. The provisions of SFAS 157 are not expected to have a materialimpact on the Company’s consolidated financial statements.

InSeptember 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Co*nsidering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements*.” SAB 108 statesthat SEC registrants should use both a balance sheet approach and an incomestatement approach when quantifying and evaluating the materiality of amisstatement, contains guidance on correcting errors under the dual approachand provides transition guidance for correcting errors existing in prior years.SAB 108 is effective for annual financial statements covering the first fiscalyear ending after November 15, 2006. The Company does not expect the adoptionof SAB 108 to have a material impact on the Company’s consolidated financialstatements.

In February 2007, theFASB issued SFAS 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115”* (“SFAS 159”). SFAS 159 permits entities to chooseto measure many financial instruments and certain other items at fair value.This statement is effective as of the beginning of an entity’s first fiscalyear that begins after November 15, 2007. The Company is currently evaluatingthe impact of SFAS 159 on the Company’s consolidated financial statements.

***Reclassifications***

Certain reclassifications were made to the 2006financial statements in order that they may be consistent with the 2007presentation.

**3.****    ****Acquisitions**

***Woodridge Labs, Inc***

OnMarch 9, 2006, the Company, through W Lab Acquisition Corp., the Company’swholly owned subsidiary, acquired substantially all of the assets of JocottEnterprises, Inc (“Jocott”). Jocott formerly operated under the name “WoodridgeLabs, Inc.”  The assets of Jocott wereacquired pursuant to an asset purchase agreement, which agreement is referredto as the “Woodridge Asset Purchase Agreement” in these financialstatements.  The acquisition of theassets of Jocott and all related transactions are referred to in these financialstatements as the “Woodridge Transaction.” Subsequently, W Lab Acquisition Corp. was renamed Woodridge Labs,Inc.  As used in these financialstatements, the term “Woodridge” refers to Jocott for all periods prior toMarch 9, 2006 and to the Company’s wholly owned subsidiary Woodridge Labs, Inc.from and after March 9, 2006.  Woodridge’sfinancial results have only been included for the period subsequent to March 9,2006.

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Theoriginal purchase price comprised:

·                  $23.2 million incash, including $0.8 million of acquisition expenses paid to third parties;

·                  8,467,410unregistered restricted shares of Nextera’s Class A Common Stock constitutingapproximately 20% of the total outstanding common stock of Nextera immediatelyafter such issuance, which shares were issued to Jocott.  Such shares had a value of $4.2 million onthe date of the Woodridge Transaction; and

·                  theassumption of a promissory note of Jocott in the principal amount of $1.0million, which assumed debt was paid in full by the Company on the closing dateof the Woodridge Transaction.

$2.0million of the cash portion of the purchase price was originally placed inescrow through September 2007. On March 29, 2007, Nextera, Woodridge andJocott entered into an Indemnity Deposit Agreement. Under the terms of theIndemnity Deposit Agreement, $0.5 million was withdrawn from the escrow accountthat was established in connection with the Woodridge Transaction and suchfunds were paid to Nextera by Jocott as a deposit to be held by Nextera andWoodridge pending any final determination that Jocott is obligated under theWoodridge Asset Purchase Agreement to indemnify Woodridge or Nextera fordamages in connection with the March 2007 product recall of certainDermaFreeze365TM products sold by Woodridge.

Nextera,Woodridge, Mounte LLC and Jocott entered into a Funding Agreement, dated April16, 2007 (“Funding Agreement”), whereby Jocott paid as an additionalirrevocable indemnity deposit, an amount equal to $1.5 million. The additionaldeposit was also made by withdrawing such amount from the escrow account thatwas established in connection with the Woodridge Transaction. The partiesagreed that the terms and conditions of the Funding Agreement will govern boththe original and additional indemnity deposits. The Jocott deposit of $2.0million will not bear interest and Nextera and Woodridge may use the depositfunds to satisfy any liabilities, obligations or other requirements of eitheror both of Nextera and Woodridge. The deposits will be deemed to be in satisfactionand payment in full of any and all past, present and future claims forindemnification for any breaches of any of the representations and warrantiespursuant to the Woodridge Asset Purchase Agreement that originally would havesurvived for only eighteen months following the closing date of the WoodridgeTransaction, but does not apply to any claims for breaches of anyrepresentations or warranties that survive beyond the eighteen month period.The deposits are the sole and exclusive property of Nextera and Nextera has noliability or obligation to account for or return or refund any portion of thedeposits or any earnings on the deposits. Accordingly, the entire $2.0 million was recorded as a reduction of thepurchase price and therefore a reduction of goodwill related to the WoodridgeTransaction in March 2007.

The WoodridgeTransaction was accounted for under the purchase method of accounting inaccordance with SFAS No. 141 (SFAS 141), “*Business Combinations*.”  Under the purchase method of accounting, thetotal estimated purchase price is allocated to the net tangible and intangibleidentifiable assets and liabilities based on their estimated relative fairvalues. The excess purchase price over those assigned values was recorded asgoodwill. Goodwill recorded as a result of this acquisition is deductible fortax purposes. The final purchase price allocation is as follows (in thousands):

| Current assets            |   | $      | 4,559  |   |
|---------------------------|--------|--------|--------|--------|
| Long-term assets          |   | 389    |   |
| Goodwill                  |   | 8,969  |   |
| Intangible  assets        |   | 13,000 |   |
| Total assets  acquired    |   | $      | 26,917 |   |
| Less liabilities  assumed |   | 1,703  |   |
|                      |   | $      | 25,214 |   |

 

The following tablesets forth the unaudited pro forma results in thousands, except for share data,of the Company’s operations for the three months ended March 31, 2006 as if theacquisition of Woodridge had been completed on January 1, 2006. Theunaudited pro forma results are not indicative of what the actual results wouldhave been had the acquisition been completed on January 1, 2006 nor do theypurport to indicate the results of future operations or the future operationsof Nextera.
| Net sales                                                          |   | $      | 3,275  |   |
|--------------------------------------------------------------------|--------|--------|--------|--------|
|                                                               |   |   |   |
| Loss from  operations before income taxes                          |   | (386   | )      |
|                                                               |   |   |   |
| Net loss                                                           |   | (415   | )      |
| Preferred stock  dividends                                         |   | (84    | )      |
| Net loss  applicable to common stockholders                        |   | $      | (499   | )      |
|                                                               |   |   |   |
| Weighted average  common shares outstanding—basic and diluted |   | 35,940 |   |
|                                                               |   |   |   |
| Basic and diluted loss  per share                                  |   | $      | (0.01  | )      |

 

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Theamortization of the inventory step-up, which represents an increase to the inventoryto reflect its fair value (less selling profit) and results in an increase incost of sales upon the sale of the inventory, has been excluded from the pro forma amounts as the costs arenon-recurring. The 2007 net loss and loss from continuingoperations includes a $189,000 charge for expected returns and awrite-down of inventories related to the March 2007 voluntary recall of certainDermaFreeze365TM products sold by Woodridge in 2007.

***LaVarAcquisition***

OnMay 23, 2006, Woodridge entered into a purchase agreement with LaVar Holdings,Inc. (the LaVar Purchase Agreement), whereby Woodridge acquired the exclusiveworldwide license rights, along with certain other assets and proprietaryrights, to the Ellin LaVar TexturesÔhair care product line and brand name. The total purchase price, which includes approximately $0.1 million ofnon-recurring transactions costs, was approximately $0.5 million. Under theterms of the LaVar Purchase Agreement, Woodridge will pay a royalty to LaVarHoldings, Inc. with respect to certain future sales of products under theacquired trademarks.

***Heavy DutyAcquisition***

OnMarch 8, 2007, Woodridge entered into a purchase agreement with Heavy DutyCompany (the Heavy Duty Purchase Agreement), whereby Woodridge acquired theexclusive worldwide license rights, along with certain other assets andproprietary rights, to the Heavy DutyÔpersonal care product line and brand name. The total purchase price, which includes approximately $0.1 million ofnon-recurring transactions costs, was approximately $0.3 million. Under theterms of the Heavy Duty Purchase Agreement, Woodridge will pay a royalty to theHeavy Duty Company with respect to certain future sales of products under theacquired trademarks.

**4.****   ****Inventories**

Inventories consist of the following: 
|                | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **     | ** ** | **(In thousands)**      | ** ** |
|           |       |                         |       |                            |       |
| Raw materials  |       | $                            | 1,195      |                            | $          | 1,217 |   |
| Finished goods |       | 991                          |       | 1,378                           |       |
|           |       | $                            | 2,186      |                            | $          | 2,595 |   |

 

**5.****    ****Intangible Assets**

Intangibleassets consist of the following:
|                                 | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
|                            |       |                    |       |                  |       |
| Goodwill                        |       | $                       | 8,969      |                  | $          | 10,969 |   |
|                            |       |                    |       |                  |       |
| Trademarks and  brands          |       | 2,200                   |       | 2,200                 |       |
| Covenant not to  compete        |       | 1,600                   |       | 1,600                 |       |
| Customer  relationships         |       | 9,200                   |       | 9,200                 |       |
| Licensing  agreements           |       | 735                     |       | 489                   |       |
| Other                           |       | 36                      |       | 64                    |       |
|                            |       | 13,771                  |       | 13,553                |       |
| Less:  accumulated amortization |       | 957                     |       | 726                   |       |
| Intangible assets, net          |       | $                       | 12,814     |                  | $          | 12,827 |   |

 

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The intangible assets,other than the covenant not to compete, are amortized over their estimateduseful lives, which range from 10-20 years. The covenant not to compete isamortized over its contractual life of 9 years.

Theestimated intangible amortization expense for the next five years is asfollows:
|            | ** ** | **Amortization Expense** | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **(In thousands)**       | ** ** |
|       |       |                          |       |
| 2007       |       | $                             | 730        |   |
| 2008       |       | 931                           |       |
| 2009       |       | 931                           |       |
| 2010       |       | 931                           |       |
| 2011       |       | 931                           |       |
| 2012       |       | 931                           |       |
| Thereafter |       | 7,429                         |       |
|            |            |                               |            |  |

 

**6. ****  ****Propertyand Equipment**

Propertyand equipment are stated at cost and is summarized by major classification asfollows:
|                                 | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
|                            |       |                    |       |                  |       |
| Equipment                       |       | 149                     |       | $                     | 182        |   |
| Tools and dies                  |       | 101                     |       | 85                    |       |
| Software                        |       | 18                      |       | 25                    |       |
| Furniture and  fixtures         |       | 33                      |       | 53                    |       |
| Leasehold  Improvements         |       | 19                      |       | 19                    |       |
|                            |       | 320                     |       | 364                   |       |
| Less:  accumulated depreciation |       | 43                      |       | 80                    |       |
| Property and equipment,  net    |       | $                       | 277        |                  | $          | 284 |   |
|                                 |            |                         |            |                       |            |  |  |

 

**7.****    ****Accounts Payable and AccruedExpenses**

Accounts payable and accrued expensesconsist of the following:
|                                               | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **(In thousands)**  | ** ** |
|                                          |       |                     |       |                        |       |
| Trade accounts  payable                       |       | $                        | 619        |                        | $          | 1,717 |   |
| Accrued credit  customer balances             |       | 3,120                    |       | 1,859                       |       |
| Accrued payroll  and compensation             |       | 70                       |       | 129                         |       |
| Accrued legal,  audit and annual report costs |       | 159                      |       | 134                         |       |
| Accrued  severance                            |       | —                   |       | 270                         |       |
| Accrued interest                              |       | 66                       |       | 65                          |       |
| Accrued  commission                           |       | 67                       |       | —                      |       |
| Other                                         |       | 223                      |       | 190                         |       |
|                                          |       | $                        | 4,324      |                        | $          | 4,364 |   |

 

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**8.****    ****Financing Arrangements**

Inconnection with the acquisition of substantially all of the assets of Jocott,Nextera and Woodridge (as borrower) entered into a credit agreement onMarch 9, 2006 for a $15.0 million senior secured credit facility, whichwas originally comprised of a $10.0 million fully-drawn term loan and afour-year $5.0 million revolving credit facility (the “Credit Agreement”). TheCredit Agreement was subsequently amended on March 29, 2007 and again onApril 17, 2007.

EffectiveMarch 29, 2007, Nextera, Woodridge, the administrative agent for thelenders, and the lenders, entered into an amendment and forbearance agreement(the “Amendment and Forbearance Agreement”). The Amendment and ForbearanceAgreement amended and modified certain terms of the original Credit Agreement.Under the terms of the Amendment and Forbearance Agreement, the date by whichNextera and Woodridge were required to deliver Nextera’s audited consolidatedfinancial statements as of and for the year ended December 31, 2006 andrelated certificates and reports to the administrative agent was postponed fromMarch 31, 2007 to April 30, 2007. Additionally, a principal paymentof $250,000 that was due on March 31, 2007 was postponed to April 30,2007.

Theadministrative agent for the lenders under the Credit Agreement determinedthat, as of March 29, 2007, certain events of default under the CreditAgreement (which events of default are referred to as the “Specified Events ofDefault” in these financial statements) had occurred as a consequence of thebreach by Nextera and Woodridge of certain financial covenants as ofDecember 31, 2006. Under the Amendment and Forbearance Agreement, thelenders agreed, during the forbearance period, to forbear the exercise of anyand all rights and remedies to which the lenders are or may become entitled asa result of the Specified Events of Default. The forbearance period is theperiod of time that begins on March 29, 2007 and ends on April 30,2007, subject to earlier termination at the election of the lenders in theevent of an occurrence of any event of default under the Credit Agreement otherthan the Specified Events of Default, and subject to automatic termination inthe event of the occurrence of certain insolvency proceedings involving Nexteraor Woodridge.

OnApril 17, 2007, Nextera, Woodridge, the administrative agent and thelenders entered into an amendment agreement under the Credit Agreement (the “SecondAmendment”). Under the terms of the Second Amendment, the revolving creditfacility was reduced from $5.0 million to $2.75 million. Pursuant to the SecondAmendment, the term loan and the revolving credit facility bear interest at theLondon Interbank Offered Rate (“LIBOR”) plus 4.50 percent, or bank base rate plus3.25 percent, as selected by Woodridge, with the rate subject to adjustmentafter delivery of the Company’s compliance certificate for the fiscal quarterending June 30, 2007, based on the Company’s consolidated adjustedleverage ratio. Outstanding borrowings under the term loan must be repaid in 13quarterly payments, commencing March 31, 2008, and are in the amount of$250,000 each in 2008, $312,500 each in 2009, $437,500 each in 2010, with afinal payment due on March 31, 2011, the maturity date of the term loan.The maturity date for the revolving credit facility is March 31, 2010. Thecommitment fee on the revolving credit facility is payable quarterly at a rateof 0.50% of the unused amount of the revolving credit facility per annum. TheCompany paid an amendment fee of 0.25% of the total credit facility inconnection in connection with the Second Amendment.

TheCompany has an interest rate collar agreement to hedge the LIBOR interest raterisk on $5.0 million of the term loan. Under the terms of this agreement, theCompany will pay a 6% fixed rate if the three-month LIBOR rate exceeds 6% andin return will receive the three-month LIBOR rate. In addition, if thethree-month LIBOR rate falls below 5%, the Company will pay a 5% fixed rate andin return will receive the three-month LIBOR rate. The effect of this agreementis therefore to convert the floating three-month LIBOR rate to a fixed rate ifthe three-month LIBOR rate exceeds 6% or falls below 5%. The three-month LIBORrate received under the agreement will substantially match the rate paid on theterm loan since term loan currently bears interest at the six-month LIBOR rate.The fair value of the collar was immaterial at March 31, 2007.

Theobligations of Woodridge, as borrower, under the Credit Agreement areguaranteed by Nextera and all of the direct and indirect domestic subsidiariesof Woodridge and Nextera existing from time to time (other than NexteraBusiness Performance Solutions Group, Inc., Nextera Canada Co. and NexteraEconomics, Inc.), which are referred to as the “Subsidiary Guarantors” inthese financial statements. In addition, Nextera, Woodridge and the SubsidiaryGuarantors are party to a security agreement and a pledge agreement, whichcreate security and pledge interests with respect to substantially all presentand future property of Nextera, Woodridge and the Subsidiary Guarantors.

Underthe Credit Agreement, as amended, Nextera and Woodridge are subject to certainlimitations, including limitations on their ability: to incur additional debtor sell assets, with restrictions on the use of proceeds; to make certaininvestments and acquisitions; to grant liens; and to pay dividends and makecertain other restricted payments. In addition, Woodridge will be required toprepay principal amounts outstanding under certain circumstances if it issuesdebt or equity, sells assets or property, receives certain extraordinaryreceipts or generates excess cash flow. The Credit Agreement also containscertain restrictive financial covenants, including minimum consolidated EBITDA,maximum consolidated leverage ratio, minimum fixed charge coverage ratio,maximum consolidated capital expenditures and maximum corporate overhead.  Under the terms of the Second Amendment, therestrictive financial covenants with respect to minimum consolidated EBITDA,maximum consolidated leverage ratio, minimum fixed charge coverage ratio andmaximum corporate overhead were amended and a new minimum liquidity covenantwas added.

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TheCredit Agreement, as amended, prohibits Woodridge from making any dividends orother distributions to Nextera until the later of (1) the administrativeagent’s receipt of Nextera’s audited consolidated financial statements for theyear ending December 31, 2007, or (2) the administrative agent’sreceipt of a compliance certificate evidencing that Woodridge’s Maximum TotalLeverage Ratio (as defined in the Credit Agreement) has been reduced to 2.75xor less. In the event that these conditions are satisfied, then Woodridge wouldbe allowed to make dividend and other payments to Nextera provided that:(a) Woodridge remains in compliance with all financial covenants under theCredit Agreement on a pro forma basis after taking into account the dividendsor other distributions made to Nextera, (b) no other defaults exist beforeor after the making of any dividends or other distributions to Nextera, and(c) such dividends or other distributions (which are payable in equalquarterly amounts) in the aggregate do not exceed $1.125 million in 2008 and$1.5 million thereafter. However, beginning in 2008 and even if the conditionsdescribed in the foregoing clauses (a), (b) and (c) are notsatisfied, Woodridge is permitted to make dividends or other distributions toNextera in an amount not in excess of 50% of its Excess Cash Flow (as definedin the Credit Agreement), provided that no default would occur under the CreditAgreement as a result of the making of the dividends or other distributions.

Uponthe occurrence of certain events of default, Woodridge’s obligations under theCredit Agreement may be accelerated and the lending commitments terminated.Such events of default include, but are not limited to: (i) the failure ofWoodridge to pay principal or interest when due, (ii) Woodridge’s breachor failure to perform any of the covenants or obligations set forth in theCredit Agreement, which for certain covenants and obligations is subject to a30-day cure period, (iii) the acceleration of certain otherindebtedness of Woodridge, (iv) a filing of a petition in bankruptcy byWoodridge, (v) the entry of a judgment or a court order against Woodridgein excess of certain specified dollar thresholds, (vi) a reduction belowcertain levels in the ownership or economic interests of our existingsignificant stockholders in the aggregate or (vii) Mr. Millin ceasingto be a member of Nextera’s board of directors or the chief executive officerof Woodridge prior to March 9, 2010, except for certain specified reasons.

Long-termdebt consists of the following (in thousands):
|                                          | ** ** | **March 31,  2007** | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| Term loan                                |       | $                        | 9,500      |   |
| Revolving credit  facility               |       | 2,218                    |       |
|                                     |       | 11,718                   |       |
| Less: Current portion  of long-term debt |       | 250                      |       |
|                                     |       | $                        | 11,468     |   |

 

Futureprincipal payments required in accordance with the terms of the CreditAgreement are as follows (In thousands):
| Twelve months ending  March 31, |   |   |   |
|--------------------------------------|--------|--------|--------|
| 2008                                 |   | $      | 250    |   |
| 2009                                 |   | 1,063  |   |
| 2010                                 |   | 1,375  |   |
| 2011                                 |   | 9,030  |   |
|                                 |   | $      | 11,718 |   |

 

***FundingAgreement***

OnApril 16, 2007, Nextera, Woodridge, Mounte LLC and Jocott entered into aFunding Agreement. Under the terms of the Funding Agreement, Mounte and Jocottloaned to Nextera the principal sums of $1.5 million and $1.0 millionrespectively, pursuant to individual promissory notes. The notes accrueinterest at an annual rate of 7% with interest payable on a quarterly basis andprincipal payable at the maturity date of April 1, 2012. Nextera iscurrently prohibited from paying interest in cash on these notes under theterms of its Credit Agreement. Accordingly, interest will accrue and be addedto the principal balance of the notes. The notes, including accrued interest,may be redeemed or exchanged, at Nextera’s option, for an issuance of newlyauthorized Series B Cumulative Non-Convertible Preferred Stock of Nextera.The Series B Preferred will (i) be issued at a price equal to $100per share, (ii) have a liquidation preference equal to $100 per share,(iii) provide for a 7% paid-in-kind dividend, and (iv) have such otherrights, preferences and privileges as determined by the Board. TheSeries B Preferred will not be convertible into any other securities ofNextera and the Series B Preferred will rank junior to the existingSeries A Preferred Stock as to the payment of dividends and as to the distributionof assets upon liquidation, dissolution or winding up. The Series BPreferred will be structured so as to qualify as “Permitted Equity Interests”as such term is defined in the Company’s Credit Agreement, as amended. TheSeries B Preferred issued will be issued as an exchange or redemption ofall 

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outstandingprincipal and accrued but unpaid interest on the notes. Under the terms of theAmendment to the Credit Agreement dated April 17, 2007, such exchange orredemption must be completed by June 16, 2007. Nextera, Mounte LLC andJocott also entered into standstill agreements with the administrative agentunder the Credit Agreement to subordinate their rights under theirrespective  notes to the rights of thelenders under the Credit Agreement.

TheFunding Agreement provides that Nextera, subject to (i) any required consentsor approvals of the lenders under the Credit Agreement and of any other personswhose consent or approval is required at the time under any credit or othercontract or agreement to which Nextera, Woodridge or any of their affiliates isa party, (ii) any required consent of the holders of the outstanding Series APreferred, and (iii) the approval of the Board; that, in the event that Nextera’searnings before interest, taxes, depreciation and amortization (“EBITDA”) for afiscal year is greater than or equal to $7.0 million or is greater than orequal to $12.0 million for any two consecutive fiscal years, or any eventhappens that results in the exchange or redemption of, or payment of aliquidation preference with respect to, any of Nextera’s outstanding preferredstock (the “Triggering Event”), Nextera will take the following actions:

a)              Within15 business days after the occurrence of a Triggering Event, Nextera will issueto Jocott additional shares of Series B Preferred at a price equal to $100 pershare.  The number of such additionalshares to be issued to Jocott will be equal to the quotient obtained bydividing (i) the sum of (A) $1,000,000, plus (B) the Appreciation Amountdefined below, by (ii) 100, and rounding down to the nearest whole share.  Such shares of Series B Preferred will beissued to Jocott in consideration of Jocott’s irrevocable payment of the $2.0million indemnity deposit and Jocott’s compromise and settlement of the past,pending and future specified claims. The “Appreciation Amount” means an amountequal to a deemed appreciation equal to (1) $1,000,000, multiplied by (2) sevenpercent (7%) per annum, compounded annually, calculated from the date that Jocottloans the funds to Nextera pursuant to the promissory note issued by Jocottuntil the date of the any issuance of the additional shares of Series BPreferred to Jocott.

b)             Within15 business days after the occurrence of a Triggering Event, Nextera will alsoissue to Jocott the same number of shares of Series C CumulativeNon-Convertible Preferred Stock of Nextera as the number of additional sharesof Series B Preferred issued to Jocott. The Series C Preferred will (i) be issued at a price equal to $100 pershare, (ii) have a liquidation preference equal to $100 per share and (iii)provide for a 7% paid-in-kind dividend. The Series C Preferred will not be convertible into any other securitiesof Nextera and the Series C Preferred will rank (i) junior to the Series APreferred as to the payment of dividends and as to the distribution of assetsupon liquidation, dissolution or winding up, and (ii) on a parity with theSeries B Preferred as to the payment of dividends and the Special RedemptionRight noted below, but rank junior to the Series B Preferred as to thedistribution of assets upon liquidation, dissolution or winding up. The SeriesC Preferred will be structured so as to comply with any applicable restrictionsin any credit or other contract or agreement to which Nextera, Woodridge or anyof their affiliates is a party.  Suchshares of Series C Preferred will be issued to Jocott in consideration ofJocott’s irrevocable payment of the $2.0 million indemnity deposit and Jocott’scompromise and settlement of the past, pending and future specified claims.

c)              Nexterawill grant to the holders of Series A Preferred, Series B Preferred and SeriesC Preferred the right (the “Special Redemption Right”), the exercise of whichis conditioned upon the occurrence of a Triggering Event, to require Nextera toredeem a portion of the shares of the Preferred Stock held by such holders at aredemption price equal to $100 per share (plus any applicable accrued butunpaid dividends on the shares so redeemed). The Special Redemption Right of the holders of Series A Preferred willbe senior and prior to the Special Redemption Rights of the holders of Series BPreferred and Series C Preferred, and the Special Redemption Rights of theholders of Series B Preferred and Series C Preferred will be on a parity witheach other.

Inconnection with and at the time of the issuance of any Series B Preferredand/or Series C Preferred, Nextera will issue warrants to purchase Nextera’sClass A Common Stock at an exercise price of $0.50 per share (the “Warrants”)to the holder of such Series B Preferred and/or Series C Preferred.The number of shares of Nextera’s Class A Common Stock for which suchwarrants will be exercisable will be equal to (i) with respect to notesredeemed or exchanged for Series B Preferred , the product of (A) theoutstanding principal balance plus all accrued but unpaid interest that wasredeemed or exchanged, multiplied by (B) two (2); (ii) 2,000,000shares with respect to the Series B Preferred Stock issued upon theoccurrence of a Triggering Event (when and if such Series B Preferred isissued), and (iii) 2,000,000 shares with respect to the Series CPreferred issued upon the occurrence of a Triggering Event (when and if suchSeries C Preferred is issued). The Warrants will have a ten (10) yearterm and have customary piggyback registration rights and anti-dilution rightsand other rights with respect to specified events, all as determined by ourboard of directors.

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**9.     Basic and Diluted Net Income (Loss) per CommonShare**

Basicnet income (loss) per share (“basic EPS”) is computed by dividing income (loss)from continuing operations applicable to common stockholders and net income(loss) applicable to common stockholders by the weighted average number ofcommon shares outstanding.  Diluted netincome (loss) per common share (“diluted EPS”) is the same as the basic lossper share for the three-month period ended March 31, 2007 and 2006 as thecomputation of diluted income (loss) per share would have an anti-dilutive effecton loss per share.

Basic and diluted loss per share were calculatedas follows:

| ** **                                                         | ** ** | **Three Months Ended March 31,**                                    | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                                                                | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands, except per share  data)** | ** ** |
|                                                               |       |                                                                                    |       |   |   |
| Loss from continuing  operations                                   |       | $                                                                                       | (1,281     | ) | $ | (665 | ) |
| Preferred stock  dividends                                         |       | (108                                                                                    | )          | (84 | ) |
| Loss from continuing  operations applicable to common stockholders |       | (1,389                                                                                  | )          | (749 | ) |
|                                                               |       |                                                                                    |       |   |   |
| Income from  discontinued operations                               |       | —                                                                                  |       | — |   |
|                                                               |       |                                                                                    |       |   |   |
| Net loss applicable to  common stockholders                        |       | $                                                                                       | (1,389     | ) | $ | (749 | ) |
|                                                               |       |                                                                                    |       |   |   |
| Weighted average common  shares outstanding—basic and diluted |       | 42,337                                                                                  |       | 35,940 |   |
|                                                               |       |                                                                                    |       |   |   |
| **Basic and diluted net loss per  common share**                   |       |                                                                                    |       |   |   |
| Loss from continuing operations                                    |       | $                                                                                       | (0.03      | ) | $ | (0.02 | ) |

 

 

**10.   Share-BasedCompensation**

For the three monthsended March 31, 2007 and 2006, the compensation cost charged against income was$0.1 million and $0.04 million, respectively. As of March 31, 2007, there wereapproximately $0.3 million of unrecognized compensation costs related tonon-vested share-based arrangements granted under the Company’s Amended andRestated 1998 Equity Participation Plan (the “Plan”). Those costs are expectedto be recognized over a weighted-average period of approximately 2 years.

During the three monthsended March 31, 2007, the Company granted stock options for an aggregate of1,037,500 shares of Class A Common Stock under the Plan. The weighted-averagegrant-date fair value of options granted was $0.15 per share based on theBlack-Scholes option-pricing model. The options expire ten years from the dateof grant.

The weighted-averagegrant date fair value of options granted during the three months ended March31, 2007 was estimated on the grant date using the Black-Scholes option-pricingmodel with the assumptions noted in the following table.  Expectedvolatilities are based on historical volatility of the Common Stock and otherfactors.  The expected term of options represents the period of time thatoptions granted are expected to be outstanding and is derived from historicalterms and other factors.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant.

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|                           | ** ** | **Three months ended  March 31, 2007** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
|                      |       |                                                       |       |
| Risk-free  interest rates |       | 4.75%                                                      |       |
| Expected lives  (years)   |       | 3 -  5                                                     |       |
| Expected  volatility      |       | 58.3%                                                      |       |
| Dividend rate             |       | 0%                                                         |       |

 

***Stock Option Activity***

Options granted, exercised, expired and forfeited under thePlan are as follows:
| **Stock Options**                                      | ** ** | **Shares** | ** ** | **Weighted  Average Exercise  Price Per Share** | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value (1)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------|------------|
| Outstanding at December  31, 2006                           |       | 6,552,267  |       | $                                                              | 1.62       |                                                   | 5.6        |                                         | $          | — |   |
| Granted                                                     |       | 1,037,500  |       | 0.28                                                           |       | 9.5                                                    |       | —                                       |       |
| Exercised                                                   |       | —     |       | —                                                         |       |                                                   |       |                                         |       |
| Forfeited or  expired                                       |       | —     |       | —                                                         |       |                                                   |       |                                         |       |
| Options Outstanding at  March 31, 2007                      |       | 7,589,767  |       | $                                                              | 1.44       |                                                   | 5.9        |                                         | $          | — |   |
| Options vested and  expected to vest at March 31, 2007 |       |       |       |                                                           |       |                                                   |       |                                         |       |
| Options exercisable at March 31, 2007                       |       | 5,913,892  |       | $                                                              | 1.71       |                                                   | 3.6        |                                         | $          | — |   |

 

The weighted-average grant-datefair value of options granted during the three months ended March 31, 2007and 2006 were $0.2 million and $0.06 million, respectively. Intrinsic value isdefined as the difference between the relevant current market value of theunderlying common stock and the grant price for options with exercise pricesless than the market values on such dates. There were no options exercisedduring the three months ended March 31, 2007 and 2006.

Options are granted at anexercise price equal to the fair market value at the date of grant. Informationregarding stock options outstanding as of March 31, 2007 is as follows:
| ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Weighted Average** | ** ** | ** ** | ** ** |
| **Range of**       | ** ** | ** **                   | ** ** | **Weighted Average**    | ** ** | **Remaining ** | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
| **Exercise Price** | ** ** | **Shares**                   | ** ** | **Exercise Price**      | ** ** | **Contractual Life** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| $0.27 - $1.00           |       | 4,327,500                    |       | $                            | 0.46       |   | 7.65 |   | 2,651,625 |   | $ | 0.45 |   |
| $1.01 - $3.00           |       | 2,947,267                    |       | 1.97                         |       | 3.54 |   | 2,947,267 |   | $ | 1.97 |   |
| $3.01 and up            |       | 315,000                      |       | $                            | 9.94       |   | 2.65 |   | 315,000 |   | $ | 9.94 |   |
|                    |       | 7,589,767                    |       | $                            | 1.44       |   | 5.64 |   | 5,913,892 |   | $ | 1.71 |   |

 

**11.  Income Taxes**

No federal tax benefit wasrecorded for the three month period ended March 31, 2007 and 2006 due to theCompany’s uncertainty associated with utilizing its net operating losses.  The Company did record de minimis state taxexpense for the three month periods ended March 31, 2006.

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**12.  Commitmentsand Contingencies**

TheCompany, from time to time, is subject to certain asserted claims arising inthe ordinary course of business. The Company intends to vigorously assert itsrights and defend itself in any litigation that may arise from such claims.While the ultimate outcome of these matters could affect the results ofoperations of any one quarter or year when resolved in future periods, andwhile there can be no assurance with respect thereto, management believes thatafter final disposition, any financial impact to the Company would not bematerial to the Company’s financial position and results of operations orliquidity.

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**ITEM 2.      MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

***As used in this report, the terms“we,” “our,” “ours” and “us” refer to Nextera Enterprises, Inc, a DelawareCorporation, or Nextera, and its wholly owned subsidiaries.  In addition, the term “Woodridge” refers toJocott for all periods prior to March 9, 2006, and to Woodridge Labs, Inc., awholly owned subsidiary of Nextera, from and after March 9, 2006, unless thecontext indicates otherwise.***

**Cautionary Note Regarding Forward-Looking Statements**

*Thefollowing discussion contains “forward-looking statements.” Forward-lookingstatements give our current expectations or forecasts of future events. Thesestatements can be identified by the factthat they do not relate strictly to historic or current facts. They usewords such as “may,” “could,” “will,” “continue,” “should,” “would,” “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other wordsand terms of similar meaning in connection with any discussion of futureoperating or financial performance. In particular, these forward-lookingstatements include statements relating to future actions or the outcome offinancial results. From time to time, we also may provide oral or writtenforward-looking statements in other materials released to the public. Any orall of the forward-looking statements in this annual report and in any otherpublic statements may turn out to be incorrect. They can be affected byinaccurate assumptions or by known or unknown risks and uncertainties.Consequently, no forward-looking statement can be guaranteed. Our actualresults may differ materially from those stated or implied by suchforward-looking statements.*

*Factorsthat could cause our actual results to differ materially include, but are notlimited to:*

·       theeffects of the voluntary recall of certain of our DermaFreeze365TM products onour business, operations and financial condition;

·       retentionof our key personnel, particularly Mr. Millin, and our ability to attractand retain other personnel critical to our business;

·       ourability to develop and introduce new products in a highly competitivemarketplace and successfully execute market expansion plans;

·       theimpact of competition within our markets, and our ability to compete againstcompanies that are larger and more well-established than we are or that havesignificantly greater resources than we do;

·       ourreliance on third parties for all of our product manufacturing requirements;

·       theloss of any of our significant customers, as our sales are concentrated among arelatively small number of customers;

·       claimsagainst us for infringement of intellectual property;

·       ourability to repay the indebtedness and comply with the covenants under oursenior secured credit facilities; and

·       otherfactors disclosed inNextera’s Annual Report on Form 10-K for the year ended December 31, 2006 underthe heading “Item 1A. Risk Factors.”

*Newfactors emerge from time to time, and it is not possible for us to predict allthese factors nor can we assess the impact of these factors on our business orthe extent to which any factor or combination of factors may cause actualresults to differ materially from those contained in any forward-lookingstatements. We undertake no obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.Given these risks and uncertainties, you should not place undue reliance onforward-looking statements as a prediction of actual results.*

****Overview****

TheManagement’s Discussion and Analysis of Financial Condition and Results ofOperations is designed to enable the reader of our financial statements toassess material changes in financial condition and results of operationsbetween the three months ended March 31, 2007 and the three months ended March31, 2006.

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NexteraEnterprises, Inc. was incorporated in the state of Delaware in 1997. OnMarch 9, 2006, Nextera, through W Lab Acquisition Corp., our wholly ownedsubsidiary, acquired substantially all of the assets of JocottEnterprises, Inc., which we refer to as Jocott in this report, whichformerly operated under the name “Woodridge Labs, Inc.”  We refer to this acquisition and all relatedtransactions in this report as the Transaction. Subsequently, our wholly ownedsubsidiary was renamed Woodridge Labs, Inc. As used in this report, theterm “Woodridge” refers to Jocott for all periods prior to March 9, 2006and to our wholly owned subsidiary Woodridge Labs, Inc. from and afterMarch 9, 2006. Prior to the acquisition of the Woodridge assets, we had nobusiness operations for the period from November 29, 2003 throughMarch 8, 2006. Woodridge’s financial results have only been included forthe period subsequent to the March 9, 2006 acquisition.

Woodridge,our sole operating business, is an independent developer and marketer ofbranded consumer products that offer simple, effective solutions to nichepersonal care needs. Since its formation in 1996, Woodridge has built itsreputation and market position by identifying and exploiting underdevelopedopportunities within the personal care market, and by commercializingdistinctive, branded products that are intended to directly address thespecific demands of niche applications. In addition to its flagship Vita-KSolution product line, Woodridge has created a portfolio of other existing anddevelopment-stage consumer products, covering a wide range of uses andapplications.

Ourproducts are marketed at retail under the following core brands: Vita-KSolution®, DermaFreeze365TM,Ellin LaVar TexturesTM, Virtual LaserTM, Psssssst®, Stoppers-4®, BathLoungeTM, Vita-C2TM, Firminol-10®and TurboShave®. With ourportfolio of products, we offer consumers affordable alternatives to expensivedermatologist treatments, while also offering retailers profitable andin-demand products. Our products can currently be found in over 22,000 retaillocations across the United States and Canada. For the fiscal year endedDecember 31, 2006, our top customers included Walgreens, CVS, andRite-Aid.

Allof our manufacturing, production and onsite assembly are presently outsourcedto third-parties, allowing us to focus on our core strength of discovering,developing and marketing niche personal care products. Most of our materialwarehousing and distribution functions are handled in-house and supervised byWoodridge management.

***ProductRecall***

OnMarch 13, 2007, our wholly-owned subsidiary, Woodridge, initiated a voluntaryrecall of certain of its DermaFreeze365TM products. This recall was a result ofcertain limited lots testing positive for the *Pseudomonas**aeruginosa* bacteria. We made a provisionfor the recall in our consolidated financial statements as of and for the yearended December 31, 2006 whereby net sales and accounts receivable werereduced by $2.3 million and inventories were written down by $0.2 millionthrough a charge to cost of sales. Additionally, we made a additional provisionof $0.2 million during the three-month period ended March 31, 2007 for theexpected customer charge-backs related to 2007 sales of the affected products.

***SecuredCredit Facility***

Inconnection with the acquisition of the Woodridge business on March 9,2006, we entered into a senior secured credit facility, which was subsequentlyamended in March 2007 and in April 2007. We refer to our amendedsenior secured credit facility in this report as the Credit Agreement. TheCredit Agreement originally consisted of a $10 million fully-drawn term loan,of which approximately $9.5 million was outstanding at December 31, 2006,and a four-year $5.0 million revolving credit facility, of which approximately$2.2 million was outstanding on December 31, 2006. Under the terms of theApril 2007 amendment, the revolving credit facility was reduced to $2.75million, of which approximately $0.5 million is available to be drawn, subjectto meeting certain conditions as described under “Financing Arrangements” tothe Notes to Unaudited Condensed Consolidated Financial Statements.

***Heavy Duty Acquisition***

OnMarch 8, 2007, we entered into a purchase agreement with Heavy DutyCompany and Alexandra Volkmann, whereby we acquired certain assets, includingthe Heavy DutyTM and other trademarks and a copyright. The total purchase price,which includes approximately $0.1 million of deal costs, was approximately $0.3million. We will pay a royalty to Heavy Duty Company with respect to certainfuture sales of products under the trademarks acquired from Heavy Duty Companyand Alexandra Volkmann.

Our tax provision has historically varied from the federalstatutory rate of 34% predominately due to deferred tax valuation allowanceadjustments, the utilization of net operating losses, and state and localtaxes.

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**Comparison of the Three Months Ended March 31,2007 and the Three Months Ended March 31, 2006**

*Net Sales*. Sales are recorded net ofestimated returns and other allowances. The provision for sales returnsrepresents management’s estimate of future returns based on historicalexperience and considering current external factors and market conditions.  Net sales for the three months ended March 31,2007 increased $1.3 million, or 122%, to $2.4 million from $1.1million for the same period last year. Net sales for the three monthsended March 31, 2006 reflect the operating results of the Woodridge businessonly from the March 9, 2006 acquisition to March 31, 2006. The2007 net sales include a $0.2 million charge for expected returnsrelated to the March 2007 voluntary recall of certain DermaFreeze365TM productssold during the three months ended March 31, 2007.

*Gross Profit*.  Gross profit for the three months ended March31, 2007 increased $0.8 million, or 135% to $1.3 million from $0.6 million forthe same period last year.  Gross profitin the 2006 period only includes operating activity for the post-Woodridgeacquisition period from March 9, 2006 to March 31, 2006. The 2007 gross profitincludes a $0.2 million charge for expected returns related to the March 2007product recall of related products sold during the three months ended March 31,2007.  Included within gross profit forthe period ended March 31, 2006 is a $0.3 million charge associated with theamortization of the step up to fair value in the inventory acquired fromWoodridge, as required by SFAS 142.

*Selling, General andAdministrative Expenses.*  Selling, general and administrative expensesfor the three months ended March 31, 2007 increased to $2.0 million or, 65%,from $1.2 million for the same period last year. Selling, general andadministrative expenses for the three months ending March 31, 2006 reflect theoperating results of the Woodridge business only from the March 9, 2006acquisition to March 31, 2006. Included in the 2007 period expenses areapproximately $0.2 million of general and administrative costs associated withthe former corporate headquarters is Boston, MA, that are not expected to berecurring after the March 31, 2007 relocation of the corporate headquarters to theWoodridge facility in Panorama City, CA.

*Amortization of IntangibleAssets.*  Amortization of intangible assets for thethree months ended March 31, 2007 increased to $0.3 million or, 729%, from$31,000 for the same period last year. The increase from the first quarter of2006 relates to the full-quarter amortization of the intangible assets acquiredas part of the Woodridge acquisition.

*Interest Income*. Interest income decreased 95% to$6,000 for the three months ended March 31, 2007 from $0.1 million for thethree months ended March 31, 2006. The decrease was due to declining cashbalances.

*Interest Expense*. Interest expense increased $0.2 million, or $281% to $0.3 million forthe three months ended March 31, 2007. The interest expense is attributable to the credit facility that weentered into on March 9, 2006 to partially fund the Woodridge acquisition.  Our debt bears interest at LIBOR plus 4.50percent.

*Income Taxes*.  No federal tax benefit was recorded for the three monthsended March 31, 2007 and 2006 due to our uncertainty associated withutilizing its net operating losses.  Wedid record de minimis state tax expense for the three month period ended March31, 2006.

**Liquidity and Capital Resources**

Consolidated working capital was($0.06) million on March 31, 2007, compared with working capital of ($0.8)million on December 31, 2006.  Includedin working capital were cash and cash equivalents of $0.4 million and $0.6million on March 31, 2007 and December 31, 2006, respectively.

Netcash used in operating activities was $0.4 million for the three months endedMarch 31, 2007. Included in the net cash used in operating activities was thenet loss of $1.2 million. Offsetting the net loss of $1.2 million were sourcesof cash of $0.4 million in inventory and $0.2 million from accounts and notesreceivable. Included in the net loss were non-cash charges of $0.3 million fordepreciation, amortization, compensation expense and reserves.

Netcash provided in investing activities was $0.3 million for the threemonths ended March 31, 2007, $0.5 million relating to cashreceived from the Woodridge acquisition escrow account, offset by $0.2 millionrelating to the purchase of the Heavy Duty licensing rights.

Therewas no financing activity during the three months ended March 31, 2007.

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Our primary source of liquidity isour cash and cash equivalents, our cash generated from operations, andavailability under our revolving credit facility.  We believethat our current cash on hand and sources of cash are sufficient to meet allexpenditures over the next twelve months.  The cash generated by the operations ofWoodridge and borrowed by Woodridge under the revolving credit facility issubject to restrictions as to the amount of funds that may be paid through adividend to Nextera to pay corporate expenses.  We believe that additional liquidity sources,if necessary, could be obtained by borrowing funds from a third party orraising equity through a public or private transaction, although these aresubject to restrictions under our Credit Agreement as amended.

OnApril 17, 2007, we entered into an amendment agreement under the CreditAgreement (the “Second Amendment”). Under the terms of the Second Amendment,the revolving credit facility was reduced from $5.0 million to $2.75 million.Pursuant to the Second Amendment, the term loan and the revolving creditfacility bear interest at the London Interbank Offered Rate (“LIBOR”) plus 4.50percent, or bank base rate plus 3.25 percent, as selected by us, with the ratesubject to adjustment after delivery of our compliance certificate for thefiscal quarter ending June 30, 2007, based on our consolidated adjustedleverage ratio. Outstanding borrowings under the term loan must be repaid in 13quarterly payments, commencing March 31, 2008, and are in the amount of$250,000 each in 2008, $312,500 each in 2009, $437,500 each in 2010, with afinal payment due on March 31, 2011, the maturity date of the term loan.The maturity date for the revolving credit facility is March 31, 2010. Thecommitment fee on the revolving credit facility is payable quarterly at a rateof 0.50% of the unused amount of the revolving credit facility per annum. Wepaid an amendment fee of 0.25% of the total credit facility in connection inconnection with the Second Amendment.

Wehave an interest rate collar agreement to hedge the LIBOR interest rate risk on$5.0 million of the term loan. Under the terms of this agreement, we will pay a6% fixed rate if the three-month LIBOR rate exceeds 6% and in return willreceive the three-month LIBOR rate. In addition, if the three-month LIBOR ratefalls below 5%, we will pay a 5% fixed rate and in return will receive thethree-month LIBOR rate. The effect of this agreement is therefore to convertthe floating three-month LIBOR rate to a fixed rate if the three-month LIBORrate exceeds 6% or falls below 5%. The three-month LIBOR rate received underthe agreement will substantially match the rate paid on the term loan sinceterm loan currently bears interest at the six-month LIBOR rate. The fair valueof the collar was immaterial at March 31, 2007.

Underthe Credit Agreement, as amended, we are subject to certain limitations,including limitations on their ability: to incur additional debt or sellassets, with restrictions on the use of proceeds; to make certain investmentsand acquisitions; to grant liens; and to pay dividends and make certain otherrestricted payments. In addition, we will be required to prepay principalamounts outstanding under certain circumstances if it issues debt or equity,sells assets or property, receives certain extraordinary receipts or generatesexcess cash flow. The Credit Agreement also contains certain restrictivefinancial covenants, including minimum consolidated EBITDA, maximumconsolidated leverage ratio, minimum fixed charge coverage ratio, maximumconsolidated capital expenditures and maximum corporate overhead.  Under the terms of the Second Amendment, therestrictive financial covenants with respect to minimum consolidated EBITDA,maximum consolidated leverage ratio, minimum fixed charge coverage ratio andmaximum corporate overhead were amended and a new minimum liquidity covenantwas added.

Uponthe occurrence of certain events of default, our obligations under the CreditAgreement may be accelerated and the lending commitments terminated. Suchevents of default include, but are not limited to: (i) our failure  to pay principal or interest when due,(ii) our breach or failure to perform any of the covenants or obligationsset forth in the Credit Agreement, which for certain covenants and obligationsis subject to a 30-day cure period, (iii) the acceleration ofcertain other indebtedness, (iv) a filing of a petition in bankruptcy byus, (v) the entry of a judgment or a court order against us in excess ofcertain specified dollar thresholds, (vi) a reduction below certain levelsin the ownership or economic interests of our existing significant stockholdersin the aggregate or (vii) Mr. Millin ceasing to be a member of ourboard of directors or chief executive officer prior to March 9, 2010,except for certain specified reasons.

***FundingAgreement***

OnApril 16, 2007, we entered into a Funding Agreement with Mounte LLC andJocott. Under the terms of the Funding Agreement, Mounte and Jocott loaned us theprincipal sums of $1.5 million and $1.0 million respectively, pursuant toindividual promissory notes. The notes accrue interest at an annual rate of 7%with interest payable on a quarterly basis and principal payable at thematurity date of April 1, 2012. We are currently prohibited from payinginterest in cash on these notes under the terms of its Credit Agreement.Accordingly, interest will accrue and be added to the principal balance of thenotes. The notes, including accrued interest, may be redeemed or exchanged, atour option, for an issuance of our newly authorized Series B CumulativeNon-Convertible Preferred Stock. The Series B Preferred will (i) beissued at a price equal to $100 per share, (ii) have a liquidationpreference equal to $100 per share, (iii) provide for a 7% paid-in-kinddividend, and (iv) have such other rights, preferences and privileges asdetermined by the Board. The Series B Preferred will not be convertibleinto any of our other securities and the Series B Preferred will rankjunior to the existing Series A Preferred Stock as to the payment ofdividends and as to the distribution of assets upon liquidation, dissolution orwinding up. The Series B Preferred will be structured so as to qualify as“Permitted Equity Interests” as such term is defined in our Credit Agreement,as amended. The Series B Preferred issued will be issued as an exchange orredemption of all outstanding principal and accrued but unpaid interest on thenotes. Under the terms of the Amendment to the Credit Agreement dated April 17,2007, such exchange or redemption must be completed by June 16, 2007.  We, along with Mounte LLC and Jocott alsoentered into standstill agreements with the administrative agent under theCredit Agreement to subordinate their rights under their respective notes tothe rights of the lenders under the Credit Agreement.

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TheFunding Agreement provides that we, subject to (i) any required consents orapprovals of the lenders under the Credit Agreement and of any other personswhose consent or approval is required at the time under any credit or othercontract or agreement to which we or any of our affiliates is a party, (ii) anyrequired consent of the holders of the outstanding Series A Preferred, and(iii) the approval of the Board; that, in the event that our earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) for a fiscal year isgreater than or equal to $7.0 million or is greater than or equal to $12.0million for any two consecutive fiscal years, or any event happens that resultsin the exchange or redemption of, or payment of a liquidation preference withrespect to, any of our outstanding preferred stock (the “Triggering Event”), wewill take the following actions:

a)              Within15 business days after the occurrence of a Triggering Event, we will issue toJocott additional shares of Series B Preferred at a price equal to $100 pershare.  The number of such additionalshares to be issued to Jocott will be equal to the quotient obtained bydividing (i) the sum of (A) $1,000,000, plus (B) the Appreciation Amountdefined below, by (ii) 100, and rounding down to the nearest whole share.  Such shares of Series B Preferred will beissued to Jocott in consideration of Jocott’s irrevocable payment of the $2.0million indemnity deposit and Jocott’s compromise and settlement of the past,pending and future specified claims. The “Appreciation Amount” means an amountequal to a deemed appreciation equal to (1) $1,000,000, multiplied by (2) sevenpercent (7%) per annum, compounded annually, calculated from the date thatJocott loans the funds to Nextera pursuant to the promissory note issued byJocott until the date of the any issuance of the additional shares of Series BPreferred to Jocott.

b)             Within15 business days after the occurrence of a Triggering Event, we will also issueto Jocott the same number of shares of our Series C Cumulative Non-ConvertiblePreferred Stock as the number of additional shares of Series B Preferred issuedto Jocott.  The Series C Preferred will(i) be issued at a price equal to $100 per share, (ii) have a liquidationpreference equal to $100 per share and (iii) provide for a 7% paid-in-kinddividend.  The Series C Preferred willnot be convertible into any of our other securities and the Series C Preferredwill rank (i) junior to the Series A Preferred as to the payment of dividendsand as to the distribution of assets upon liquidation, dissolution or windingup, and (ii) on a parity with the Series B Preferred as to the payment ofdividends and the Special Redemption Right noted below, but rank junior to theSeries B Preferred as to the distribution of assets upon liquidation,dissolution or winding up. The Series C Preferred will be structured so as tocomply with any applicable restrictions in any credit or other contract oragreement to which we or any of our affiliates is a party.  Such shares of Series C Preferred will beissued to Jocott in consideration of Jocott’s irrevocable payment of the $2.0million indemnity deposit and Jocott’s compromise and settlement of the past,pending and future specified claims.

c)              Wewill grant to the holders of Series A Preferred, Series B Preferred and SeriesC Preferred the right (the “Special Redemption Right”), the exercise of whichis conditioned upon the occurrence of a Triggering Event, to require us toredeem a portion of the shares of the Preferred Stock held by such holders at aredemption price equal to $100 per share (plus any applicable accrued butunpaid dividends on the shares so redeemed). The Special Redemption Right of the holders of Series A Preferred willbe senior and prior to the Special Redemption Rights of the holders of Series BPreferred and Series C Preferred, and the Special Redemption Rights of theholders of Series B Preferred and Series C Preferred will be on a parity witheach other. 

Inconnection with and at the time of the issuance of any Series B Preferredand/or Series C Preferred, Nextera will issue warrants to purchaseNextera’s Class A Common Stock at an exercise price of $0.50 per share(the “Warrants”) to the holder of such Series B Preferred and/orSeries C Preferred. The number of shares of Nextera’s Class A CommonStock for which such warrants will be exercisable will be equal to(i) with respect to notes redeemed or exchanged for Series B Preferred, the product of (A) the outstanding principal balance plus all accruedbut unpaid interest that was redeemed or exchanged, multiplied by (B) two(2); (ii) 2,000,000 shares with respect to the Series B PreferredStock issued upon the occurrence of a Triggering Event (when and if suchSeries B Preferred is issued), and (iii) 2,000,000 shares withrespect to the Series C Preferred issued upon the occurrence of aTriggering Event (when and if such Series C Preferred is issued). TheWarrants will have a ten (10) year term and have customary piggybackregistration rights and anti-dilution rights and other rights with respect tospecified events, all as determined by our board of directors.

**Certain Contractual Obligations, Commitments andContingencies**

Thefollowing summarizes our significant contractual obligations and commitments atMarch 31, 2007 that impact our liquidity.
| ** **                       | ** ** | **Payments due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Less than 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**          | ** ** | **Total**                                 | ** ** | **year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
|                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                   |       | $                                         | 11,718     |   | $ | 250 |   | $ | 2,438 |   | $ | 9,030 |   | $ | — |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Off Balance Sheet Arrangements**

Wehave not entered into any off-balance sheet transactions, arrangements orobligations (including contingent obligations) that have, or are reasonablylikely to have, a material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

**Critical Accounting Policies**

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities.

Webelieve the accounting policies below represent our critical accounting policies.See our Annual Report on Form 10-K for the year ended December 31, 2006 for adetailed discussion on the application of these and other accounting policies.

***Revenue Recognition,******Allowances for Sales Returnsand Markdowns**–*** Werecognize sales when title and risk of loss transfers to the customer, thesales price is fixed or determinable and collection of the resulting receivableis probable. Sales are recorded net of estimated returns and other allowances.Our provision for sales returns represents management’s estimate of futurereturns based on historical experience and considering current external factorsand market conditions.

Our sales-returnaccrual is a subjective critical estimate that has a direct impact on reportednet sales.  As is customary in the industry, we grant certain of ourcustomers, subject to authorization and approval, the right to either returnproducts or to receive a markdown allowance for certain promotional product.Upon sale, we record a provision for product returns and markdowns estimatedbased on our historical and projected experience, economic trends and changesin customer demand. There is considerable judgment used in evaluating thefactors influencing the allowance for returns and markdowns, and thereforeadditional allowances in any particular period may be needed.  The types of known or anticipated events thatwe have considered, and will continue to consider, include, but are not limitedto, the solvency of our customers, store closings by retailers, changes in theretail environment, including mergers and acquisitions, and our decision tocontinue or support new and existing products. Actual sales returns andmarkdowns may differ significantly, either favorably or unfavorably, from theseestimates.

***Provisions for Inventory Obsolescence**–***We record a provision for estimated obsolescence ofinventory. These estimates consider the cost of inventory, forecasted demand,the estimated market value, the shelf life of the inventory and historicalexperience. If there are changes to these estimates, additional provisions forinventory obsolescence may be necessary.

***Accounting for Acquisitions andIntangible Assets**–*****We have accounted for our acquisitions under the purchasemethod of accounting for business combinations. Under the purchase method ofaccounting, the cost, including transaction costs, are allocated to theunderlying net assets, based on their respective estimated fair values. Theexcess of the purchase price over the estimated fair values of the net assetsacquired is recorded as goodwill.

Our judgments made in determining the estimated fairvalue and expected useful lives assigned to each class of assets andliabilities acquired can significantly affect net income. For example,different classes of assets will have useful lives that differ and the usefullife of property, plant, and equipment acquired will differ substantially fromthe useful life of brand licenses and trademarks. Consequently, to the extent alonger-lived asset is ascribed greater value under the purchase method than ashorter-lived asset, net income in a given period may be higher.

Determiningthe fair value of certain assets and liabilities acquired is judgmental innature and often involves the use of significant estimates and assumptions. Oneof the areas that require more judgment is determining the fair value anduseful lives of intangible assets. To assist in this process, we often obtainappraisals from independent valuation firms for certain intangible assets.

Ourintangible assets primarily consist of customer relationships, non-competecovenants, exclusive brand licenses and trademarks. The value of the intangibleassets, including customer relationships and other intangibles, is exposed tofuture adverse changes if we experience declines in operating results orexperience significant negative industry or economic trends. We periodicallyreview intangible assets, at least annually or more often as circumstancesdictate, for impairment and the useful life assigned using the guidance ofapplicable accounting literature.

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***Long-Lived Assets************–*** We review for the impairment of long-lived assets to be heldand used whenever events or changes in circumstances indicate that the carryingamount of such assets may not be fully recoverable. Measurement of animpairment loss is based on the fair value of the asset compared to itscarrying value. Long-lived assets to be disposed of are reported at the lowerof carrying amount or fair value less costs to sell.

**ITEM 3.      QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

**Interest Rate Risk**

Asof March 31, 2007, we had $11.7 million in floating rate debt under ourCredit Agreement ($9.5 million under our term loan and $2.2 millionunder our revolving credit facility). Changes in interest rates would not significantlyaffect the fair value of our outstanding indebtedness. Our term loan currentlybears interest at the six-month LIBOR rate plus 4.50%. Our revolving creditborrowings currently bear interest at different rates, ranging from one-monthand three-month LIBOR plus 4.50% to base rate plus 3.25%. We have an interestrate collar agreement pertaining to $5.0 million of our term loan withrespect to the three-month LIBOR rate, which effectively caps the rate at 6%and provides for a 5% floor. Assuming the outstanding balance on our floatingrate indebtedness remains constant over a year, a 100 basis point increase inthe interest rate would decrease pre-tax income and cash flow by approximately$0.12 million.

**Foreign Currency Risk**

Weare not currently exposed to foreign currency risk because we do not currentlyhave material business operations in foreign countries and related sales andexpenses

**ITEM 4.   CONTROLS AND PROCEDURES.**

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934, as amended, and the rules and regulations thereunder, isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and that suchinformation is accumulated and communicated to management, including ourPresident and Chief Financial Officer, as appropriate, to allow for timelydecisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

Asrequired by SEC Rule 13a-15(b), we carried out an evaluation, under thesupervision and with the participation of our management, including our Presidentand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures as of the end of the period coveredby this report. Based on the foregoing, our President and Chief Financial Officerconcluded that our disclosure controls and procedures were effective at thereasonable assurance level as of March 31, 2007.

Therehave been no changes in our internal controls over financial reporting duringour most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting**.**

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**PART II – OTHER INFORMATION**

**ITEM1A.    RISK FACTORS.**

Risk factors describing the major risks to ourbusiness can be found under Item 1A, “Risk Factors,” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006, from which Item 1A.is hereby incorporated by reference. There has been no material change in ourrisk factors from those previously discussed in the Annual Report on Form 10-K.

**ITEM 6.     EXHIBITS.**

(a)          Exhibits
| 31.1 |   | Rule 13a-14(a)/15d-14(a) Certification |
|------|--------|----------------------------------------|
| 31.2 |   | Rule 13a-14(a)/15d-14(a) Certification |
| 32.1 |   | Section 1350 Certification             |
| 32.2 |   | Section 1350 Certification             |

 

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this quarterly report on Form 10-Q to be signed on its behalf bythe undersigned thereunto duly authorized.
|                           | NEXTERA  ENTERPRISES, INC.       |
|---------------------------|----------------------------------|
|                      | (Registrant)                     |
|                      |                             |
|                      |                             |
| Date:  May 15,  2007 | By:  /s/  Joseph J. Millin  |   |
|                      | Joseph J. Millin                 |
|                      | President                        |
|                      | (Principal Executive Officer)    |
|                      |                             |
| Date:  May 15,  2007 | By:  /s/  Antonio Rodriquez |   |
|                      | Antonio Rodriquez                |
|                      | Chief Financial Officer          |
|                      | (Principal Financial Officer)    |

 

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