**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2007**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from           to           **

 

**Commission File Number 000-25995**

 

**NEXTERA ENTERPRISES, 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’stelephone number, including area code)

 

Indicate by check markwhether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 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 acceleratedfiler  o  Acceleratedfiler  o  Non-acceleratedfiler x

 

Indicate by check markwhether the registrant is a shell company (as defined in rule 12b-2 of theExchange Act). YES o NO x

 

Asof November 7, 2007, 38,692,851 sharesof 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-Q**

**for the Quarter Ended September 30, 2007**

 

**INDEX**

 
| PART I. FINANCIAL INFORMATION |                                                                                                                                 |
|-------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                 |   |
| Item  1.                      | Financial Statements                                                                                                                 |   |
|                          |                                                                                                                                 |   |
|                          | Condensed Consolidated  Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006                                    |   |
|                          |                                                                                                                                 |   |
|                          | Condensed Consolidated  Statements of Operations for the Three Months and Nine Months Ended September  30, 2007 and 2006 (unaudited) |   |
|                          |                                                                                                                                 |   |
|                          | Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2007 and  2006 (unaudited)                  |   |
|                          |                                                                                                                                 |   |
|                          | 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 2.                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                         |   |
|                          |                                                                                                                                 |   |
| Item 6.                       | Exhibits                                                                                                                             |   |
|                          |                                                                                                                                 |   |
|                          | Signatures                                                                                                                           |   |
|                          |                                                                                                                                 |   |
| Exhibit 31.1                  |                                                                                                                                 |
| Exhibit 31.2                  |                                                                                                                                 |
| Exhibit 32.1                  |                                                                                                                                 |
| Exhibit 32.2                  |                                                                                                                                 |

 

2

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**PART I****                              ****FINANCIAL INFORMATION**

**ITEM 1.****                           ****FINANCIAL STATEMENTS.**

 

**Nextera Enterprises, Inc.**

**Condensed Consolidated BalanceSheets**

**(Amounts in thousands, except share amounts)**

 
| ** **                                                                                                                                                                                  | ** ** | **September 30, 2007** | ** ** | **December 31,   2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **(Unaudited)**        | ** ** | ** **              | ** ** |
| **Assets**                                                                                                                                                                                  | ** ** | ** **             | ** ** | ** **              | ** ** |
| Current assets:                                                                                                                                                                             |       |                   |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                  |       | $                      | 412        |                    | $          | 597 |   |
| Accounts  receivable, net of allowances for customer deductions and doubtful accounts  of $4,100 at September 30, 2007                                                                      |       | 741                    |       | —                  |       |
| Inventories                                                                                                                                                                                 |       | 1,983                  |       | 2,595                   |       |
| Due from  supplier                                                                                                                                                                          |       | —                 |       | 127                     |       |
| Prepaid expenses  and other current assets                                                                                                                                                  |       | 328                    |       | 260                     |       |
| Total current  assets                                                                                                                                                                       |       | 3,464                  |       | 3,579                   |       |
|                                                                                                                                                                                        |       |                   |       |                    |       |
| Property and  equipment, net                                                                                                                                                                |       | 256                    |       | 284                     |       |
| Goodwill                                                                                                                                                                                    |       | 8,969                  |       | 10,969                  |       |
| Intangible  assets, net                                                                                                                                                                     |       | 12,377                 |       | 12,827                  |       |
| Other assets                                                                                                                                                                                |       | 461                    |       | 484                     |       |
| Total assets                                                                                                                                                                                |       | $                      | 25,527     |                    | $          | 28,143 |   |
|                                                                                                                                                                                        |       |                   |       |                    |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                              | ** ** | ** **             | ** ** | ** **              | ** ** |
| Current  liabilities:                                                                                                                                                                       |       |                   |       |                    |       |
| Accounts payable  and accrued expenses                                                                                                                                                      |       | $                      | 1,876      |                    | $          | 4,364 |   |
| Revolver credit  facility                                                                                                                                                                   |       | 2,750                  |       |                    |       |
| Current portion  of long-term debt                                                                                                                                                          |       | 750                    |       | —                  |       |
| Total current  liabilities                                                                                                                                                                  |       | 5,376                  |       | 4,364                   |       |
|                                                                                                                                                                                        |       |                   |       |                    |       |
| Long-term debt,  net of current portion                                                                                                                                                     |       | 8,750                  |       | 11,718                  |       |
|                                                                                                                                                                                        |       |                   |       |                    |       |
| Deferred taxes                                                                                                                                                                              |       | 416                    |       | 236                     |       |
| Other long-term  liabilities                                                                                                                                                                |       | 934                    |       | 1,334                   |       |
| Commitments and  contingencies                                                                                                                                                              |       | —                 |       | —                  |       |
|                                                                                                                                                                                        |       |                   |       |                    |       |
| Redeemable  Preferred Stock, $0.001 par value. Liquidation preference of $100 per share:                                                                                                    |       |                   |       |                    |       |
| Series B  Cumulative Non-Convertible, 200,000 authorized shares designated, 25,801 and  0 issued and outstanding at September 30, 2007 and December 31, 2006,  respectively.                |       | 1,869                  |       | —                  |       |
| Series C  Cumulative Non-Convertible, 200,000 authorized shares designated, none  outstanding at September 30, 2007 and December 31, 2006.                                                  |       | —                 |       | —                  |       |
|                                                                                                                                                                                        |       |                   |       |                    |       |
| Stockholders’  equity:                                                                                                                                                                 |       |                   |       |                    |       |
| Preferred Stock,  $0.001 par value, 10,000,000 shares authorized. Liquidation preference of  $100 per share:                                                                                |       |                   |       |                    |       |
| Series A  Cumulative Convertible, 600,000 authorized shares designated, 55,398 and  52,429 issued and outstanding at September 30, 2007 and December 31, 2006,  respectively.               |       | 5,540                  |       | 5,243                   |       |
| Class A Common  Stock, $0.001 par value, 95,000,000 shares authorized, 38,692,851 and  38,492,851 shares issued and outstanding at September 30, 2007 and December  31, 2006, respectively. |       | 39                     |       | 38                      |       |
| Class B Common  Stock, $0.001 par value, 4,300,000 shares authorized, 3,844,200 shares issued  and outstanding at September 30, 2007 and December 31, 2006, respectively.                   |       | 4                      |       | 4                       |       |
| Additional  paid-in capital                                                                                                                                                                 |       | 165,711                |       | 165,218                 |       |
| Accumulated  deficit                                                                                                                                                                        |       | (163,112               | )          | (160,012                | )          |
| Total  stockholders’ equity                                                                                                                                                            |       | 8,182                  |       | 10,491                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                            |       | $                      | 25,527     |                    | $          | 28,143 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

3

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**Nextera Enterprises, Inc.**

 

**Condensed Consolidated Statementsof Operations**

**(Amounts in thousands, except share amounts;unaudited)**

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net sales                                                      |       | $                                     | 1,709      |                                 | $          | 3,800 |   | $ | 7,101 |   | $ | 8,460 |   |
| Cost of sales                                                  |       | 820                                   |       | 1,282                                |       | 3,020 |   | 3,639 |   |
| Gross profit                                                   |       | 889                                   |       | 2,518                                |       | 4,081 |   | 4,821 |   |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Selling, general  and administrative expenses                  |       | 1,645                                 |       | 2,129                                |       | 5,659 |   | 5,659 |   |
| Amortization of  intangible assets                             |       | 276                                   |       | 146                                  |       | 808 |   | 329 |   |
| Operating  income(loss)                                        |       | (1,032                                | )          | 243                                  |       | (2,386 | ) | (1,167 | ) |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Interest income                                                |       | —                                |       | 23                                   |       | 6 |   | 178 |   |
| Interest expense                                               |       | (350                                  | )          | (319                                 | )          | (941 | ) | (706 | ) |
| Other income  (expense)                                        |       | (1                                    | )          | —                               |       | 1 |   | — |   |
| Loss from  continuing operations before income taxes           |       | (1,383                                | )          | (53                                  | )          | (3,320 | ) | (1,695 | ) |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Provision  (benefit) for income taxes                          |       | (340                                  | )          | 475                                  |       | (220 | ) | 504 |   |
| Loss from  continuing operations                               |       | (1,043                                | )          | (528                                 | )          | (3,100 | ) | (2,199 | ) |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Income from  discontinued operations                           |       | —                                |       | —                               |       | — |   | 35 |   |
| Net loss                                                       |       | (1,043                                | )          | (528                                 | )          | (3,100 | ) | (2,164 | ) |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Preferred stock  dividends                                     |       | (140                                  | )          | (90                                  | )          | (350 | ) | (264 | ) |
| Net loss  applicable to common stockholders                    |       | $                                     | (1,183     | )                                    | $          | (618 | ) | $ | (3,450 | ) | $ | (2,428 | ) |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net loss per  common share, basic and diluted                  |       |                                  |       |                                 |       |   |   |   |   |
| Continuing  operations                                         |       | $                                     | (0.03      | )                                    | $          | (0.01 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
| Discontinued  operations                                       |       | (—                               | )          | (—                              | )          | (— | ) | (— | ) |
| Net loss per  common share, basic and diluted                  |       | $                                     | (0.03      | )                                    | $          | (0.01 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  common shares outstanding, basic and diluted |       | 42,470                                |       | 42,337                               |       | 42,381 |   | 40,205 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

4

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**Nextera Enterprises, Inc.**

 

**Condensed Consolidated Statementsof Cash Flows**

**(Amounts in thousands; unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                    | (3,100     | ) | $ | (2,164 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                 |       |   |   |
| Depreciation                                                                 |       | 52                                   |       | 36 |   |
| Amortization of  intangible assets                                           |       | 808                                  |       | 329 |   |
| Provision for  allowances and returns                                        |       | 1,033                                |       | — |   |
| Inventory  write-down                                                        |       | 163                                  |       | — |   |
| Deferred taxes                                                               |       | 180                                  |       | 504 |   |
| Stock based  compensation                                                    |       | 184                                  |       | 175 |   |
| Gain on sale of  fixed assets                                                |       | (1                                   | )          | — |   |
| Change in  operating assets and liabilities:                                 |       |                                 |       |   |   |
| Accounts  receivable                                                         |       | (2,481                               | )          | (1,043 | ) |
| Inventories                                                                  |       | 449                                  |       | 843 |   |
| Prepaid expenses  and other assets                                           |       | (151                                 | )          | (126 | ) |
| Accounts payable  and accrued expenses                                       |       | (2,054                               | )          | 633 |   |
| Net cash used in  operating activities                                       |       | (4,918                               | )          | (813 | ) |
|                                                                         |       |                                 |       |   |   |
| **Investing  activities**                                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Cash recovered  from acquisition escrow                                      |       | 2,000                                |       | — |   |
| Acquisition of  business, net of cash acquired                               |       | —                               |       | (22,967 | ) |
| Purchase of  intellectual property and licensing agreement                   |       | (276                                 | )          | — |   |
| Purchase of  fixed assets                                                    |       | (23                                  | )          | (59 | ) |
| Net cash  provided by (used in) investing activities                         |       | 1,701                                |       | (23,026 | ) |
|                                                                         |       |                                 |       |   |   |
| **Financing  activities**                                                    |       |                                 |       |   |   |
| Borrowing  (payments) under revolving credit facility                        |       | 532                                  |       | 2,068 |   |
| Borrowings under  term note                                                  |       | —                               |       | 10,000 |   |
| Payment of term  note                                                        |       | —                               |       | (250 | ) |
| Payment of note  acquired in acquisition                                     |       | —                               |       | (1,000 | ) |
| Payment of debt  issuance costs                                              |       | —                               |       | (490 | ) |
| Proceeds from  issuance of note payable                                      |       | 2,500                                |       | — |   |
| Net cash  provided by financing activities                                   |       | 3,032                                |       | 10,328 |   |
|                                                                         |       |                                 |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (185                                 | )          | (13,511 | ) |
|                                                                         |       |                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 597                                  |       | 15,043 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                    | 412        |   | $ | 1,532 |   |
|                                                                         |       |                                 |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                        | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Cash paid during  the period for:                                            |       |                                 |       |   |   |
| Interest                                                                     |       | $                                    | 730        |   | 640 |   |
| Income Taxes                                                                 |       | 1                                    |       | — |   |
| Non-cash  financing activity:                                                |       |                                 |       |   |   |
| Conversion of  note payable to preferred stock and warrant                   |       | 2,500                                |       | — |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

5

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**NEXTERA ENTERPRISES, INC.**

** **

**NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements of Nextera Enterprises,Inc. (“Nextera” or the “Company”) for the three months and nine months endedSeptember 30, 2007 and 2006 have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included. Operatingresults for the nine-month period ended September 30, 2007 are not necessarilyindicative of the results that may be expected for the year ending December 31,2007.

 

The condensedconsolidated balance sheet as of December 31, 2006 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements.

 

These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto, together with management’sdiscussion and analysis of financial condition and results of operations,contained in the Company’s Annual Report on Form 10-K filed by the Company withthe Securities and Exchange Commission on April 17, 2007.

 

On March 9, 2006, theCompany, through a wholly-owned subsidiary, acquired substantially all of theassets of Jocott Enterprises, Inc. (“Jocott”), formerly Woodridge Labs, Inc.Subsequently, the wholly owned subsidiary was renamed Woodridge Labs, Inc. Asused herein, the term “Woodridge” refers to Jocott for all periods prior toMarch 9, 2006 and to Nextera’s wholly owned subsidiary Woodridge Labs, Inc.from and after March 9, 2006. Prior to the acquisition of the Woodridge assets,Nextera had no business operations for the period from November 29, 2003through March 8, 2006. Woodridge’s financial results have been included for theperiod subsequent to the acquisition date, March 9, 2006.

 

Woodridge, Nextera’s soleoperating business, is an independent developer and marketer of brandedconsumer products that offer solutions to niche personal care needs. Brandssold by Woodridge include Vita-K Solution, DermaFreeze 365TM, EllinLaVar 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., “Mounte”)******controls a majority of thevoting rights of the Company’s equity securities through its ownership of theCompany’s Class A Common Stock, Class B Common Stock, Series ACumulative Convertible Preferred Stock (“Series A Preferred”) and Series B Cumulative Non-ConvertiblePreferred Stock (“Series B Preferred”).

 

The accompanying condensed consolidatedfinancial statements have been prepared on the basis that the Company is agoing concern. In March 2007, the Company voluntarily recalled certain productsin its DermaFreeze365TM product line, resulting in adjustments to accountsreceivable and inventory of $2.5 million and $0.2 million, respectively. Primarily as a result of these factors, the Company negotiated revisions to itsfinancial covenants for 2007 with its lender (see footnote 8).  TheCompany was successful in revising its financial covenants to provide for thedeferral of certain covenants until 2008, as well as reducing the thresholds ofother covenants that remain in effect throughout 2007.  Further, theCompany entered into various agreements with certain of its shareholders toobtain $4.5 million in additional subordinated financing which was fundedduring March and April 2007 and further amended its credit facility in  November 2007 to obtain additional working capitalbridge financing of $2.5 million (see footnote 8).  The Company’s forecastfor 2007 anticipates compliance with all required financial covenantsthroughout 2007; however, management of the Company can provide no assurancesthat such compliance can be maintained.  Should future events occur thatare not now anticipated, the Company could be in violation of some or all ofits covenants in 2007 and in 2008.

 

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

 

***Principles of Consolidation***

 

Thecondensed consolidated financial statements include the accounts of the Companyand its subsidiaries. Significant intercompany accounts and transactions havebeen eliminated in the consolidation.

 

6

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***Use of******Estimates***

 

Thepreparation of condensed consolidated financial statements in conformity withU.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported period. Actual results could differ from those estimates.

 

***Cashand Cash Equivalents***

 

Cash and cash equivalentsconsist of cash on hand and demand deposit accounts. The Company considers allhighly liquid investments with maturity of three months or less when purchasedto be cash equivalents. Cash equivalents are stated at cost, which approximatesmarket value.

 

***Concentration of Credit Risk***

 

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprincipally of cash and cash equivalents and accounts receivable. The Companyplaces its cash and cash equivalents in various financial institutions withhigh credit ratings and, by policy, limits the amount of credit exposure to anyone financial institution.

 

Concentrations of creditrisk with respect to accounts receivable exist due to a limited number ofcustomers that make up the Company’s customer base. Three customers accountedfor 82% of gross accounts receivable as of September 30, 2007. The Companyperforms ongoing credit evaluations of its customers and generally does notrequire collateral. The Company maintains allowances for doubtful accounts forspecifically identified estimated losses resulting from the inability of itscustomers to make required payments. Gross sales (net sales prior to customerdeductions) to the Company’s three largest customers made up 73% and 63% oftotal gross sales for the three-month and nine-month periods ending September30, 2007.

 

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

 

Salesare recognized when title and risk of loss transfer to the customer, the salesprice is fixed or determinable and the collection of the resulting receivableis probable. Sales are recorded net of estimated returns and other allowances.The provision for sales returns represents management’s estimate of futurereturns based on historical experience and considering current external factorsand market conditions.

 

The sales-return accrualis a subjective critical estimate that has a direct impact on reported netsales.  As is customary in the industry, the Company grants certain of itscustomers, subject to authorization and approval, the right to either returnproducts or to receive a markdown allowance for certain promotional product.Upon sale, the Company records a provision for product returns and markdownsestimated based on historical and projected experience, economic trends andchanges in customer demand. There is considerable judgment used in evaluatingthe factors influencing the allowance for returns and markdowns, and thereforeadditional allowances in any particular period may be needed. The types of knownor anticipated events that the Company has considered, and will continue toconsider, include, but are not limited to, the solvency of its customers, storeclosings by retailers, changes in the retail environment, including mergers andacquisitions, and the Company’s decision to continue or support new andexisting products. Actual sales returns and markdowns may differ significantly,either favorably or unfavorably, from these estimates.

 

***Advertising**, Promotionand Marketing***

 

All costs associated withadvertising, promoting and marketing (including promotions, direct selling,co-op advertising and media placement) of Company products are expensed asincurred and charged to selling, general and administrative expense. For thethree months ended September 30, 2007 and 2006, advertising and promotionexpenses were $0.2 million and $0.6 million, respectively. For the ninemonths ended September 30, 2007 and 2006, advertising and promotion expenseswere $0.8 million and $1.6 million, respectively

 

***Shipping andHandling Costs***

 

Substantially all costsassociated with shipping and handling of products to customers are included inselling, general and administrative expense. For the three months endedSeptember 30, 2007 and 2006, shipping and handling costs were approximately$0.1 million and $0.1 million, respectively. For the nine months endedSeptember 30, 2007 and 2006, shipping and handling costs were approximately$0.3 million and $0.3 million, respectively.

 

7

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***Inventories***

 

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

 

***Provisions for Inventory Obsolescence***

 

The Company records aprovision for estimated obsolescence of inventory. These estimates consider thecost of inventory, forecasted demand, the estimated market value, the shelflife of the inventory and historical experience. If there are changes to theseestimates, additional provisions for inventory obsolescence may be necessary.

 

***Property and Equipment***

 

Property and equipmentare stated at cost. Depreciation of property and equipment is provided on thestraight line method based on the estimated lives of the assets. The principalestimated useful lives used in computing depreciation and amortization are asfollows:

 
| Equipment and vehicles |   | 3 - 5 years |
|------------------------|--------|-------------|
| Furniture and fixtures |   | 3 - 5 years |
| Software               |   | 3 years     |

 

Leasehold improvementsare amortized over the shorter of the life of the lease or the estimated usefullife of the asset.

 

***Accounting for Acquisitions and Intangible Assets***

 

 The Company has accounted for its acquisitions under the purchasemethod of accounting for business combinations. Under the purchase method ofaccounting, the costs, 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.

 

The judgments made indetermining the estimated fair value and expected useful lives assigned to eachclass of assets and liabilities acquired can significantly affect net income.For example, different classes of assets will have useful lives that differ andthe useful life of property, plant and equipment acquired will differ substantiallyfrom the useful life of brand licenses and trademarks. Consequently, to theextent a longer-lived asset is ascribed greater value under the purchase methodthan a shorter-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 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 experiences 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***

 

The Company reviews forthe impairment of long-lived assets to be held and used whenever events orchanges in circumstances indicate that the carrying amount of such assets maynot be fully recoverable. Measurement of an impairment loss is based on thefair value of the asset compared to its carrying value. Long-lived assets to bedisposed of are reported at the lower of carrying amount or fair value lesscosts to sell.

 

8

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***DeferredFinancing Costs***

 

The Company has incurredcosts in connection with its credit agreement. Costs directly associated withfinancings are capitalized as deferred financing costs and are amortized overthe weighted average life of the long-term credit facility.

 

***Basic and Diluted Earnings Per Common Share***

 

TheCompany presents two earnings per share amounts: the basic earnings per commonshare and the diluted earnings per common share. Basic earnings per commonshare includes only the weighted average shares outstanding and excludes anydilutive effects of options, warrants and convertible securities. The dilutiveeffects of options, warrants and convertible securities are added to theweighted average shares outstanding in computing diluted earnings per commonshare. For the three and nine-month periods ended September 30, 2007 and 2006,basic and diluted earnings per common share are the same due to theantidilutive effect of potential common shares outstanding.

 

***Income Taxes***

 

The Company adopted theprovisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109” (“FIN 48”), on January 1, 2007.  The impact ofadopting FIN 48 was not material to the Company’s financial position or resultsof operations. Excluding the federal benefits on state tax positions andfederal and state benefits on interest which have been recorded as deferredincome taxes, there are no unrecognized tax benefits.

 

Thereare no income tax examinations currently in process.

 

***Share-Based Compensation***

 

Allshare-based payments to employees, including the grant of employee stockoptions, are recognized in the condensed consolidated financial statementsbased on their fair value. Compensation cost for awards that vest will not bereversed if the awards expire without being exercised. The fair value of stockoptions is determined using the Black-Scholes option-pricing model.Compensation costs for awards are amortized using the straight-line method.Option pricing model input assumptions such as expected term, expectedvolatility and risk-free interest rate impact the fair value estimate. Further,the forfeiture rate impacts the amount of aggregate compensation. Theseassumptions are subjective and generally require significant analysis andjudgment to develop. When estimating fair value, some of the assumptions arebased on or determined from external data and other assumptions are derivedfrom historical experience. The appropriate weight to place on historicalexperience is a matter of judgment, based on relevant facts and circumstances.

 

TheCompany relies on its historical experience and post-vested terminationactivity to provide data for estimating its expected term for use indetermining the fair value of its stock options. The Company currentlyestimates its stock volatility by considering its historical stock volatilityexperience and other key factors. The risk-free interest rate is the impliedyield currently available on U.S. Treasury zero-coupon issues with a remaining termequal to the expected term used as the input to the Black-Scholes model. TheCompany estimates 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 thethree-month periods ended September 30, 2007 and 2006, there were no additionalmaterial other components of comprehensive loss.

 

***Recently Issued Accounting Pronouncements***

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting 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 

 

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Company plans to adopt SFAS No. 157 in the first quarter ofits 2008 fiscal year. The provisions of SFAS 157 are not expected to havea material impact on the Company’s consolidated financial statements.

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS158, “*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106,and 132(R)”* (“SFAS 158”). SFAS 158 requires an employer to recognizethe overfunded or underfunded status of a defined benefit postretirement plan(other than a multiemployer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income of a business entity orchanges in unrestricted net assets of a not-for-profit organization. ThisStatement also improves financial reporting by requiring an employer to measurethe funded status of a plan as of the date of its year-end statement offinancial position, with limited exceptions. This statement is effective as ofthe beginning of an entity’s first fiscal year that begins after December 15,2006. The provisions of SFAS 158 are not expected to have a material impact onthe Company’s consolidated financial statements.

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 159, “*The Fair Value Option for Financial Assets and Financial Liabilities –Including an amendment of FASB Statement No. 115”* (“SFAS 159”). SFAS159 permits entities to choose to measure many financial instruments andcertain other items at fair value. This statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.The Company is currently evaluating the impact of SFAS 159 on the Company’sconsolidated financial statements.

 

***Reclassifications***

 

Certainreclassifications were made to the 2006 financial statements in order that theymay be consistent with the 2007 presentation.

 

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

 

***Woodridge Labs, Inc***

 

On March 9, 2006, theCompany, through W Lab Acquisition Corp., the Company’s wholly ownedsubsidiary, acquired substantially all of the assets of Jocott. Jocott formerlyoperated under the name “Woodridge Labs, Inc.” The assets of Jocott were acquired pursuant to an asset purchaseagreement, which agreement is referred to as the “Woodridge Asset PurchaseAgreement” in these financial statements. The acquisition of the assets ofJocott and all related transactions are referred to in these financialstatements as the “Woodridge Transaction.” Subsequently, W Lab Acquisition Corp. was renamed Woodridge Labs, Inc. Asused in these financial statements, the term “Woodridge” refers to Jocott forall periods prior to March 9, 2006 and to the Company’s wholly owned subsidiaryWoodridge Labs, Inc. from and after March 9, 2006. Woodridge’s financialresults have only been included for the period subsequent to the acquisitiondate, March 9, 2006.

 

The purchase pricecomprised:

 

•                  $23.2million in cash, including $0.8 million of acquisition expenses paid to thirdparties;

 

•                  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 avalue of $4.2 million on the 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.

 

$2.0 million of the cashportion of the purchase price was originally placed in escrow through September2007. On March 29, 2007, Nextera, Woodridge and Jocott entered into anIndemnity Deposit Agreement, under which $0.5 million was withdrawn from the escrow account that was establishedin connection with the Woodridge Transaction and such funds were paid toNextera by Jocott as a deposit to be held by Nextera and Woodridge pending anyfinal determination under which Jocott was obligated under the Woodridge AssetPurchase Agreement to indemnify Woodridge or Nextera for damages in connectionwith the March 2007 product recall of certain DermaFreeze365TM productssold by Woodridge.

 

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Nextera, Woodridge,Mounte and Jocott entered into a Funding Agreement, dated April 16, 2007 (“FundingAgreement”), whereby Jocott paid as an additional irrevocable indemnitydeposit, an amount equal to $1.5 million. The additional deposit was also madeby withdrawing such amount from the escrow account that was established inconnection with the Woodridge Transaction. The parties agreed that the termsand conditions of the Funding Agreement will govern both the original andadditional indemnity deposits. The Jocott deposit of $2.0 million will not bearinterest and Nextera and Woodridge may use the deposit funds to satisfy anyliabilities, obligations or other requirements of either or both of Nextera andWoodridge. The deposits will be deemed to be in satisfaction and payment infull of any and all past, present and future claims for indemnification for anybreaches of any of the representations and warranties pursuant to the WoodridgeAsset Purchase Agreement that originally would have survived for only eighteenmonths following the closing date of the Woodridge Transaction, but does notapply to any claims for breaches of any representations or warranties thatsurvive beyond the eighteen month period. The deposits are the sole andexclusive property of Nextera and Nextera has no liability or obligation toaccount for or return or refund any portion of the deposits or any earnings onthe deposits. Accordingly, the entire $2.0 million was recorded as a reductionof the purchase price and therefore a reduction of goodwill related to theWoodridge Transaction in March 2007.

 

TheWoodridge Transaction was accounted for under the purchase method of accountingin accordance with SFAS No. 141, “*Business Combinations*”(“SFAS 141”)  Under the purchase methodof accounting, the total estimated purchase price is allocated to the nettangible and intangible identifiable assets and liabilities based on theirestimated relative fair values. The excess purchase price over those assignedvalues was recorded as goodwill. Goodwill recorded as a result of thisacquisition is deductible for tax purposes. The final purchase price allocationis 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 table sets forth the unaudited proforma results in thousands, except for share data, of the Company’s operationsfor the nine months ended September 30, 2006 as if the acquisition of Woodridgehad 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 the future operations of Nextera.

 
| ** **                                                         | ** ** | **Nine months ended  September 30,   2006** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Net sales                                                          |       | $                                           | 10,639     |   |
|                                                               |       |                                        |       |
| Loss from  continuing operations before income taxes               |       | (110                                        | )          |
|                                                               |       |                                        |       |
| Net loss                                                           |       | (649                                        | )          |
| Preferred stock  dividends                                         |       | (264                                        | )          |
| Net loss  applicable to common stockholders                        |       | $                                           | (385       | ) |
|                                                               |       |                                        |       |
| Weighted average  common shares outstanding—basic and diluted |       | 42,337                                      |       |
|                                                               |       |                                        |       |
| Basic and  diluted loss per share                                  |       | $                                           | (0.01      | ) |

 

The amortization of the inventory step-up, whichrepresents an increase to the inventory to reflect its fair value (lessselling profit) and results in an increase in cost of sales upon the sale ofthe inventory, has been excluded fromthe pro forma amounts as the costs are non-recurring.

 

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***LaVar Acquisition***

 

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 includesapproximately $0.1 million of transactions costs, was approximately $0.5million. Under the terms of the LaVar Purchase Agreement, Woodridge will pay aroyalty to LaVar Holdings, Inc. with respect to certain future sales ofproducts under the acquired trademarks.

 

***Heavy Duty Acquisition***

 

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, whichincludes approximately $0.1 million of transactions costs, was approximately$0.3 million. Under the terms of the Heavy Duty Purchase Agreement, Woodridgewill pay a royalty to the Heavy Duty Company with respect to certain futuresales of products under the acquired trademarks.

 

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

 

Inventories, net of provision for obsolescence,consist of the following: 

 
| ** **     | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------|------------|-------------------------|------------|------------------------|------------|
| ** **     | ** ** | **(In thousands)**      | ** ** |
|           |       |                    |       |                   |       |
| Raw materials  |       | $                       | 910        |                   | $          | 1,217 |   |
| Finished goods |       | 1,073                   |       | 1,378                  |       |
|           |       | $                       | 1,983      |                   | $          | 2,595 |   |

 

**5.****             ****IntangibleAssets**

 

Intangible assets consistof the following:

 
| ** **                      | ** ** | **September 30,**  | ** **  | **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           |       | 785                |        | 489              |       |
| Other                           |       | 37                 |        | 64               |       |
|                            |       | 13,822             |        | 13,553           |       |
| Less:  accumulated amortization |       | 1,445              |        | 726              |       |
| Intangible  assets, net         |       | $                  | 12,377      |             | $          | 12,827 |   |

 

The intangible assets, other than the covenant notto compete, are amortized over their estimated useful lives, which range from10-20 years. The covenant not to compete is amortized over its contractual lifeof 9 years.

 

The estimated intangibleamortization expense for the next five years is as follows:

 
| ** ** | ** ** | **Amortization Expense** | ** ** |
|------------|------------|--------------------------|------------|
| ** ** | ** ** | **(In thousands)**       | ** ** |
|       |       |                     |       |
| 2007       |       | $                        | 244        |   |
| 2008       |       | 936                      |       |
| 2009       |       | 937                      |       |
| 2010       |       | 936                      |       |
| 2011       |       | 937                      |       |
| 2012       |       | 936                      |       |
| Thereafter |       | 7,451                    |       |
|            |            |                          |            |  |

 

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

 

Property and equipmentare stated at cost and are summarized by major classification as follows:

** **
| ** **                      | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                      | ** ** | **2007**           | ** ** | **2006**         | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
|                            |       |               |       |             |       |
| Equipment                       |       | $                  | 166        |             | $          | 182 |   |
| Tools and dies                  |       | 107                |       | 85               |       |
| Software                        |       | 17                 |       | 25               |       |
| Furniture and  fixtures         |       | 26                 |       | 53               |       |
| Leasehold  Improvements         |       | 19                 |       | 19               |       |
|                            |       | 335                |       | 364              |       |
| Less:  accumulated depreciation |       | 79                 |       | 80               |       |
| Property and  equipment, net    |       | $                  | 256        |             | $          | 284 |   |

 

**7.****             ****AccountsPayable and Accrued Expenses**

 

Accountspayable and accrued expenses consist of the following:

 
| ** **                                    | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **(In thousands)**      | ** ** |
|                                          |       |                    |       |                   |       |
| Trade accounts  payable                       |       | $                       | 422        |                   | $          | 1,717 |   |
| Accrued credit  customer balances             |       | 834                     |       | 1,859                  |       |
| Accrued payroll  and compensation             |       | 176                     |       | 129                    |       |
| Accrued legal,  audit and annual report costs |       | 178                     |       | 134                    |       |
| Accrued  severance                            |       | —                  |       | 270                    |       |
| Accrued interest                              |       | 130                     |       | 65                     |       |
| Accrued  commission                           |       | 42                      |       | —                 |       |
| Other                                         |       | 94                      |       | 190                    |       |
|                                          |       | $                       | 1,876      |                   | $          | 4,364 |   |

 

**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,April 17, 2007 and again on November 7, 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 payment of$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 

 

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agreed, during theforbearance period, to forbear the exercise of any and all rights and remediesto which the lenders are or may become entitled as a result of the SpecifiedEvents of Default. The forbearance period began on March 29, 2007 andended on April 30, 2007.

 

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%, or bank base rate plus3.25%, as selected by Woodridge.

 

OnNovember 7, 2007, Nextera, Woodridge, Mounte, the administrative agent and thelenders entered into an amendment agreement under the Credit Agreement (the “ThirdAmendment”). Under the terms of the Third Amendment, the Company obtained abridge loan credit facility aggregating $2.5 million. Pursuant to the ThirdAmendment, the bridge loan facility , the term loan and the revolving creditfacility will bear interest at the London Interbank Offered Rate (“LIBOR”) plus5.0%, or bank base rate plus 4.0%, as selected by Woodridge. Outstandingborrowings under the bridge loan facility must be repaid with cash balances inexcess of $500,000 through the final maturity of May 31, 2008. Outstandingborrowings under the term loan must be repaid in 4 quarterly payments,commencing March 31, 2008, with a final payment due on March 31,2009, the maturity date of the term loan. The maturity date for the revolvingcredit facility is also March 31, 2009. The commitment fee on therevolving credit facility is payable quarterly at a rate of 0.50% of the unusedamount of the revolving credit facility per annum. Additionally, the financialcovenants were waived for periods prior to November 7, 2007 and modifiedthereafter.

 

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 ($56,000) at September 30, 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, as amended, alsocontains certain restrictive financial covenants, including minimumconsolidated earnings before interest,taxes, depreciation and amortization (“EBITDA”), minimum purchase orderlevels and maximum corporate overhead, as defined..

 

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 other indebtednessof Woodridge, (iv) a filing of a petition in bankruptcy by Woodridge,(v) the entry of a judgment or a court order against Woodridge in excessof certain specified dollar thresholds, (vi) a reduction below certainlevels in the ownership or economic interests of our existing significantstockholders in the aggregate or (vii) Mr. Millin ceasing to be amember of Nextera’s board of directors or the chief executive officer ofWoodridge prior to March 9, 2010, except for certain specified reasons.

 

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Long-termdebt consists of the following (in thousands):

 
| ** **                               | ** ** | **September 30,  2007** | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| Term loan                                |       | $                       | 9,500      |   |
| Revolving credit  facility               |       | —                  |       |
|                                     |       | 9,500                   |       |
| Less: Current  portion of long-term debt |       | 750                     |       |
|                                     |       | $                       | 8,750      |   |

 

Futureprincipal payments required in accordance with the terms of the CreditAgreement are as follows (in thousands):

 
| Twelve months  ending September 30, |   |   |   |
|------------------------------------------|--------|--------|--------|
| 2008                                     |   | $      | 750    |   |
| 2009                                     |   | 8,750  |   |
|                                     |   | $      | 9,500  |   |

 

***FundingAgreement and Note Conversion Agreements***

*** ***

OnApril 16, 2007, Nextera, Woodridge, Mounte and Jocott entered into aFunding Agreement (the “Funding Agreement”). Under the terms of the FundingAgreement, Mounte and Jocott loaned to Nextera the principal sums of $1.5million and $1.0 million respectively, pursuant to individual promissory notes.The notes accrued interest at an annual rate of 7% with principal originallypayable at the maturity date of April 1, 2012. Nextera was prohibited frompaying interest in cash on these notes under the terms of its Credit Agreement.Accordingly, interest was accrued and added to the principal balance of thenotes. The notes, including accrued interest, were exchanged in connection withthe Note Conversion Agreement discussed below.

 

TheFunding Agreement provides, subject to (i) any required consents or approvalsof the lenders under the Credit Agreement and of any other persons whoseconsent or approval is required at the time under any credit or other contractor agreement to which Nextera, Woodridge or any of their affiliates is a party,(ii) any required consent of the holders of the outstanding Series A Preferred,and (iii) the approval of the Board; that, in the event that Nextera’s EBITDAfor a fiscal year is greater than or equal to $7.0 million or is greater thanor equal 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)              Within 15business days after the occurrence of a Triggering Event, Nextera will issue toJocott additional shares of Cumulative Non-convertible Series B Preferred Stock(“Series B Preferred”) in addition to the shares of Series B Preferred issuedin connection with the Note Conversion Agreement, at a price equal to $100 pershare. The number of such additional shares to be issued to Jocott will beequal to the quotient obtained by dividing (i) the sum of (A) $1,000,000, plus(B) the Appreciation Amount defined below, by (ii) 100, and rounding down tothe nearest whole share. Such shares of Series B Preferred will be issued toJocott in consideration of Jocott’s irrevocable payment of the $2.0 millionindemnity deposit and Jocott’s compromise and settlement of the past, pendingand future specified claims. The “Appreciation Amount” means an amount equal toa deemed appreciation equal to (1) $1,000,000, multiplied by (2) seven percent(7%) per annum, compounded annually, calculated from the date that Jocottloaned the funds to Nextera pursuant to the promissory note issued by Jocott untilthe date of the issuance of the additional shares of Series B Preferred toJocott.

 

b)             Within 15business 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 (“Series C Preferred”) of Nextera as the numberof additional shares of Series B Preferred issued to Jocott. The Series CPreferred will (i) be issued at a price equal to $100 per share, (ii) have aliquidation 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 anyother securities of Nextera and the Series C Preferred will rank (i) junior tothe Series A Preferred as to the payment of dividends and as to thedistribution of assets upon liquidation, dissolution or winding up, and (ii) ona parity with the Series B Preferred as to the payment of dividends and theSpecial Redemption Right noted below, but rank junior to the Series B Preferredas to the distribution of assets upon liquidation, dissolution or winding up.The Series C Preferred will be structured so as to comply with any applicablerestrictions in any credit or other contract or agreement to which Nextera,Woodridge or any of their affiliates is a party. Such 

 

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shares of Series CPreferred will be issued to Jocott in consideration of Jocott’s irrevocablepayment of the $2.0 million indemnity deposit and Jocott’s compromise andsettlement of the past, pending and future specified claims.

 

c)              Nextera willgrant to the holders of Series A Preferred, Series B Preferred and Series CPreferred the right (the “Special Redemption Right”), the exercise of which isconditioned upon the occurrence of a Triggering Event, the request of theholders and the approval of the Company’s board of directors,  to redeem all or a portion of the shares ofthe Preferred Stock held by such holders at a redemption price equal to $100per share (plus any applicable accrued but unpaid dividends on the shares soredeemed). The Special Redemption Right of the holders of Series A Preferredwill be senior and prior to the Special Redemption Rights of the holders ofSeries B Preferred and Series C Preferred, and the Special Redemption Rights ofthe holders of Series B Preferred and Series C Preferred will be on a paritywith each other.

 

Additionally,under the provisions of the Funding Agreement, in connection with and at thetime of the issuance of any Series B Preferred and/or Series CPreferred, Nextera issued warrants to purchase Nextera’s Class A CommonStock at an exercise price of $0.50 per share (the “Warrants”) to the holder ofsuch Series B Preferred and/or Series C Preferred. The number ofshares of Nextera’s Class A Common Stock for which such warrants areexercisable is equal to (i) with respect to notes redeemed or exchangedfor Series B Preferred , the product of (A) the outstanding principalbalance plus all accrued but unpaid interest that was redeemed or exchanged, multipliedby (B) two (2); (ii) 2,000,000 shares with respect to theSeries B Preferred Stock issued upon the occurrence of a Triggering Event(when and if such Series B Preferred is issued), and (iii) 2,000,000shares with respect to the Series C Preferred issued upon the occurrenceof a Triggering 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 Nextera’s board of directors.

 

OnJune 15, 2007, Nextera entered into a Note Conversion Agreement wherebyNextera exchanged all outstanding principal and accrued interest owed to Mounteand Jocott pursuant to individual promissory notes executed in connection withthe Funding Agreement for 15,169 and 10,113 shares, respectively, of Nextera’sSeries B Preferred together with a cash payment in lieu of fractional shares.The Series B Preferred Stock was issued at a price of $100 per share, hasa liquidation preference of $100 per share, provides for a 7% per annumcumulative paid-in-kind dividend, and entitles its holders to a number of votesequal to the number of shares held. The Series B Preferred Stock is notconvertible into any other securities of Nextera and ranks junior to theSeries A Preferred Stock as to the payment of dividends, the issuance of aspecial redemption, and the distribution of assets upon liquidation,dissolution or winding up. The Series B Preferred Stock is structured soas to qualify as “Permitted Equity Interests” as such term is defined inNextera’s Credit Agreement, as amended.

 

In connection with theissuance of the issuance of the Series B Preferred Stock, Nextera issued aClass A Common Stock Purchase Warrant to, each of Mounte and Jocott,pursuant to the terms of a Funding Agreement. Under such Warrants, Nexteragranted Mounte and Jocott the right to purchase 3,033,945 and 2,022,630 shares,respectively, of Nextera’s Class A Common Stock at an exercise price of$0.50 per share, exercisable at any time at the option of the holder. Thewarrants have a ten-year term and have customary piggyback registration rightsand anti-dilution rights with respect to specified events. The fair value ofthe warrants has been determined to be $647 thousand. This amount wascalculated using the Black-Scholes pricing model with the followingassumptions: 118.9% volatility; expected term of 10 years; 5.10% risk-freerate; and 0% dividend.

 

The Series B Preferred isclassified as mezzanine equity as the Redemption Rights are effectivelyredeemable at the option of the holders and are not solely within the controlof the issuer. The initial carrying amount of the Series B Preferred is thefair value at issuance. The Series B Preferred will not be accreted to theredemption value of $2.5 million until redemption is considered probable. The7% paid-in-kind dividend accrues to the carrying value of the Series BPreferred.

 

**9.****             ****Share-Based Compensation**

 

Forthe three months ended September 30, 2007 and 2006, the compensation costcharged against income was $0.03 million and $0.07 million, respectively. Forthe nine months ended September 30, 2007 and 2006, the compensation costcharged against income was $0.2 million and $0.2 million, respectively. As ofSeptember 30, 2007, there were approximately $0.2 million of unrecognizedcompensation costs related to non-vested share-based arrangements granted underthe Company’s Amended and Restated 1998 Equity Participation Plan (the “Plan”).Those costs are expected to be recognized over a weighted-average period ofapproximately one year.

 

Duringthe three months ended September 30, 2007, the Company granted stock optionsfor an aggregate of 400,000 shares of Class A Common Stock under the Plan to anon-employee with an Independent Contractor 

 

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agreement with KKG BodyFuelFoods Enterprises. The weighted-average grant-date fair value of optionsgranted was $0.13 per share based on the Black-Scholes option-pricing model.The options expire ten years from the date of grant.

 

Theweighted-average grant date fair value of options granted during the ninemonths ended September 30, 2007 was estimated on the grant date using theBlack-Scholes option-pricing model with the assumptions noted in the followingtable.  Expected volatilities are based on historical volatility of theCommon Stock and other factors.  The expected term of options representsthe period of time that options granted are expected to be outstanding and isderived from historical terms and other factors.  The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant.

 
| ** **                | ** ** | **Nine months ended  September 30, 2007** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
|                      |       |                                      |       |
| Risk-free  interest rates |       | 4.75%                                     | -          | 5.10% |   |
| Expected lives  (years)   |       | 3                                         | -          | 5 |   |
| Expected  volatility      |       | 58.3%                                     | -          | 118.9% |   |
| Dividend rate             |       | 0%                                        |       |

 

***Stock Option Activity***

 

Optionsgranted, exercised, expired and forfeited under the Plan are as follows:

 
| **Stock Options**                                          | ** ** | **Shares** | ** ** | **Weighted  Average Exercise  Price Per Share** | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  December 31, 2006                          |       | 6,552,267  |       | $                                                    | 1.62       |                                                   |       |                                |       |   |
| Granted                                                    |       | 1,651,168  |       | 0.24                                                 |       |                                                   |       |                                |       |
| Exercised                                                  |       | —     |       | —                                               |       |                                                   |       |                                |       |
| Forfeited or  expired                                      |       | 1,375,000  |       | 1.25                                                 |       |                                                   |       |                                |       |
| Options  Outstanding at September 30, 2007                 |       | 6,828,435  |       | $                                                    | 1.36       |                                                   | 6.0        |                                | $          | — |   |
| Options vested  and expected to vest at September 30, 2007 |       | 6,204,732  |       | $                                                    | 1.46       |                                                   | 5.0        |                                | $          | — |   |
| Options  exercisable at September 30, 2007                 |       | 5,286,977  |       | $                                                    | 1.65       |                                                   | 5.0        |                                | $          | — |   |

 

Theweighted-average grant-date fair value of options granted during the ninemonths ended September 30, 2007 and 2006 were $0.13 and $0.35, respectively.Intrinsic value is defined as the difference between the relevant currentmarket value of the underlying common stock and the grant price for optionswith exercise prices less than the market values on such dates. There were nooptions exercised during the three months ended September 30, 2007 and 2006.

 

Optionsare granted at an exercise price equal to the fair market value at the date ofgrant. Information regarding stock options outstanding as of September 30, 2007is as follows:

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**             | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------------------|------------|
| **Range of   Exercise Price** | ** ** | **Shares**              | ** ** | **Weighted Average Exercise Price** | ** ** | **Weighted Average Remaining Contractual Life** | ** ** | **Shares** | ** ** | **Weighted Average Exercise Price** | ** ** |
| $0.16 - $ 1.00           |       | 3,851,168               |       | $                                   | 0.41       |   | 7.9 |   | 2,309,710 |   | $ | 0.43 |   |
| $1.01 - $ 3.00           |       | 2,762,267               |       | $                                   | 2.00       |   | 3.1 |   | 2,762,267 |   | $ | 2.00 |   |
| $3.01 and up                  |       | 215,000                 |       | $                                   | 10.32      |   | 2.0 |   | 215,000 |   | $ | 10.32 |   |
|                          |       | 6,828,435               |       | $                                   | 1.36       |   | 6.0 |   | 5,286,977 |   | $ | 1.65 |   |

 

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**10.****      ****Income Taxes**

 

For the three monthsended September 30, 2007 and 2006, the provision for federal and state taxesamounted to ($0.3) million and $0.5 million, respectively. For the nine monthsended September 30, 2007 and 2006, the provision for federal and state taxesamounted to ($0.2) million and $0.5 million, respectively. During the three monthsended September 30, 2006, $0.4 million was recorded for a potential taxliability which at the time was deemed probable. The period for review of thistax position expired in September 2007. Since the period for review haselapsed, the $0.4 million was reversed in the current period. The effectiveincome tax rate reflects the book to tax difference from goodwill amortization.Additionally, income tax benefits from the available net operating losses arenot reflected in the 2007 and 2006 provisions as the realization of thesebenefits is not deemed more likely than not.

 

**11.****      ****Commitments and Contingencies**

 

The Company, from timeto time, is subject to certain asserted claims arising in the ordinary courseof business. The Company intends to vigorously assert its rights and defenditself in any litigation that may arise from such claims. While the ultimateoutcome of these matters could affect the results of operations of any onequarter or year when resolved in future periods, and while there can be noassurance with respect thereto, management believes that after finaldisposition, any financial impact to the Company would not be material to theCompany’s financial position and results of operations or liquidity.

 

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**ITEM 2.****    ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.**

 

***As used inthis report, the terms “we,” “our,” “ours” and “us” refer to NexteraEnterprises, Inc, a Delaware Corporation, or Nextera, and its wholly owned subsidiaries.In addition, the term “Woodridge” refers to Jocott****Enterprises, Inc., or Jocott**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.*

** **

**CautionaryNote Regarding Forward-Looking Statements**

 

*The following discussioncontains “forward-looking statements.” Forward-looking statements give ourcurrent expectations or forecasts of future events. These statements can be identified by the fact that they do not relatestrictly to historic or current facts. They use words such as “may,” “could,”“will,” “continue,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,”“intend,” “plan,” “believe” and other words and terms of similar meaning inconnection with any discussion of future operating or financial performance. Inparticular, these forward-looking statements include statements relating tofuture actions or the outcome of financial results. From time to time, we also mayprovide oral or written forward-looking statements in other materials releasedto the public. Any or all of the forward-looking statements in this annualreport and in any other public statements may turn out to be incorrect. Theycan be affected by inaccurate assumptions or by known or unknown risks anduncertainties. Consequently, no forward-looking statement can be guaranteed.Our actual results may differ materially from those stated or implied by suchforward-looking statements.*

* *

*Factors that could cause ouractual results to differ materially include, but are not limited to:*

* *

•       the effectsof the voluntary recall of certain of our DermaFreeze365TM products on ourbusiness, operations and financial condition;

 

•       our abilityto repay the indebtedness and comply with the covenants under our seniorsecured credit facilities;

 

•       retention ofour key personnel, particularly Mr. Millin, and our ability to attract andretain other personnel critical to our business;

 

•       our abilityto develop and introduce new products in a highly competitive marketplace andsuccessfully execute market expansion plans;

 

•       the impactof competition within our markets, and our ability to compete against companiesthat are larger and more well-established than we are or that havesignificantly greater resources than we do;

 

•       our relianceon third parties for all of our product manufacturing requirements;

 

•       the loss ofany of our significant customers, as our sales are concentrated among arelatively small number of customers;

 

•       claimsagainst us for infringement of intellectual property; and

 

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

 

*New factors emerge from timeto time, and it is not possible for us to predict all these factors nor can weassess the impact of these factors on our business or the extent to which anyfactor or combination of factors may cause actual results to differ materiallyfrom those contained in any forward-looking statements. We undertake noobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise. Given these risks anduncertainties, you should not place undue reliance on forward-lookingstatements 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 and nine months ended September 30, 2007 and the threemonths and nine months ended September 30, 2006.

 

Nexterawas incorporated in the state of Delaware in 1997. On March 9, 2006,Nextera, through W Lab Acquisition Corp., our wholly owned subsidiary, acquiredsubstantially all of the assets of Jocott, which formerly 

 

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operated under the name “WoodridgeLabs, Inc.”  We refer to thisacquisition and all related transactions in this report as the Transaction.Subsequently, our wholly owned subsidiary was renamed Woodridge Labs, Inc.As used in this report, the term “Woodridge” refers to Jocott for all periodsprior to March 9, 2006 and to our wholly owned subsidiary WoodridgeLabs, Inc. from and after March 9, 2006. Prior to the acquisition ofthe Woodridge assets, we had no business operations for the period fromNovember 29, 2003 through March 8, 2006. Woodridge’s financialresults have only been included for the 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, Heavy DutyTM, Virtual LaserTM, Psssssst®, Stoppers-4®, Bath LoungeTM, Vita-C2TM, Firminol-10® and TurboShave®.With our portfolio of products, we offer consumers affordable alternatives toexpensive dermatologist treatments, while also offering retailers profitableand in-demand products. Our products can currently be found in over 22,000retail locations 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 material warehousingand distribution functions are handled in-house and supervised by Woodridgemanagement.

 

***Product Recall***

 

On March 13, 2007,our wholly-owned subsidiary, Woodridge, initiated a voluntary recall of certainof its DermaFreeze365TM products. This recall was a result of certain limitedlots testing positive for the *Pseudomonas**aeruginosa* bacteria. We made a provision for the recall inour consolidated financial statements as of and for the year endedDecember 31, 2006 whereby net sales and accounts receivable were reducedby $2.3 million and inventories were written down by $0.2 million through acharge to cost of sales. Additionally, we made an additional provision of $0.2million during the three-month period ended March 31, 2007 for the expected customercharge-backs related to 2007 sales of the affected products. No additionalprovisions have been made for the recall during the three-month period endedSeptember 30, 2007.

 

***Secured Credit 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, April 2007 and again on November 7, 2007. Werefer to our amended senior secured credit facility in this report as theCredit Agreement. The Credit Agreement originally consisted of a $10 millionfully-drawn term loan, of which approximately $9.5 million was outstanding atDecember 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 the April 2007 amendment, the revolving credit facilitywas reduced to $2.75 million. Under the terms of the November 2007amendment, the Company obtained additional bridge loan financing of $2.5million due no later than the final maturity of May 31, 2008. Additionally, thefinancial covenants were waived for periods prior to November 7, 2007 andmodified thereafter. The maturities of the term loan and the revolving creditfacility were also accelerated to March 31, 2009. At September 30, 2007, therevolving credit facility was fully drawn down. At September 30, 2007 theCompany failed to meet certain conditions as described under the “FinancingArrangements” to the Note to Unaudited Condensed Consolidated FinancialStatements.

 

***HeavyDuty Acquisition***

*** ***

On March 8, 2007,we entered into a purchase agreement with Heavy Duty Company and AlexandraVolkmann, whereby we acquired certain assets, including the Heavy DutyTM andother trademarks and a copyright. The total purchase price, which includesapproximately $0.1 million of deal costs, was approximately $0.3 million. Wewill pay a royalty to Heavy Duty Company with respect to certain future salesof products under the trademarks acquired from Heavy Duty Company and AlexandraVolkmann.

 

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***KKGBodyFuel Foods License Agreement***

*** ***

On June 21, 2007,we entered into an Intellectual Property License Agreement with KKG BodyFuelFoods Enterprises, Incorporated and Keri Glassman, whereby we acquired certainrights and licenses to use various trademarks names and slogans. Theconsideration consisted of a non-refundable guaranteed royalty payment of $0.1million in the first year and minimum royalty payments of $0.1 million in eachof the next three years.

 

Additionally, on June25, 2007 we entered into an Independent Contractor Agreement with KKG BodyFuelFoods Enterprises which provides a monthly fee of $5,000 plus expenses, a stockissuance of 200,000 shares of our Class A Common Stock and a stock option topurchase 400,000 shares of our Class A Common Stock in exchange for promotionalservices from Keri Glassman. The effective date of the agreement is July 24,2007.

 

**Comparison of the Three MonthsEnded September 30, 2007 and 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. Netsales for the three months ended September 30, 2007 decreased$2.1 million, or 55%, to $1.7 million from $3.8 million for the same periodlast year. The net sales decrease in the current period related to adecrease in both unit quantities shipped of 22%, and an average unit pricedecrease of 23%, as well as an increase in customer credits of  $0.1 million. Additionally, $1.7 million ofthe decrease in net sales relates to the sales of the Virtual Laser productline in the third quarter of 2006.

 

*Gross Profit*.Gross profit for the three months ended September 30, 2007 decreased $1.6million, or 65% to $0.9 million from $2.5 million for the same period last year.Included within gross profit for the three months ended September 30, 2006 wasa $0.1 million charge associated with the amortization of the step up to fairvalue in the inventory acquired from Woodridge, as required by SFAS No. 142, “*Goodwilland Other Intangible Assets,”* or**SFAS142. Eliminating the prior year step up to fair value charge of $0.1million, the comparative gross profit for the three-months ended September 30,2007 decreased $1.7 million, or 66% from $2.6 million for the same period lastyear. The decline in gross profit is due to the lower volume of sales of lowermargin products, increased customer credits, increased labor costs as well asan increase in charges for inventory reserves during the three-months endedSeptember 30, 2007.

 

*Selling, General and Administrative Expenses.*Selling,general and administrative expenses for the three months ended September 30,2007 decreased $0.5 million, or 23%, to $1.6 million from $2.1 million for thesame period last year. The decrease is due to decreased spending for sellingand advertising expense of $0.5 million, decrease in labor and facility costsof $0.1 million related to the transfer of the corporate offices from Boston,offset by an increase in legal and accounting professional service fees of $0.1million.

 

*Amortization of Intangible Assets.*Amortizationof intangible assets for the three months ended September 30, 2007 increased to$0.3 million or, 89%, from $0.2 million for the same period last year.

 

*Interest Expense*. Interest expense was consistent at$0.3 million for the three months ended September 30, 2007 and for the sameperiod last year. The interest expense is attributable to the credit facilitythat we entered into on March 9, 2006 to partially fund the Woodridgeacquisition. Our debt bears interest at the London Interbank Offered Rate orLIBOR plus 4.50%.

 

*Provision for Income Taxes*. For thethree months ended September 30, 2007, our benefit from federal and state taxesamounted to $0.3 million compared to a provision of $0.5 million for the sameperiod in 2006. The decrease in the tax provision of $0.8 million is primarilythe result of the reversal of valuation allowances in which the period forexamination has expired. The effective income tax rate reflects the book to taxdifference from goodwill amortization. Additionally, income tax benefits fromthe available net operating losses are not reflected in the 2007 and 2006provisions as the realization of these benefits is not deemed more likely thannot.

 

**Comparison of the Nine MonthsEnded September 30, 2007 and 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. Netsales for the nine months ended September 30, 2007 decreased$1.4 million, or 16%, 

 

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to $7.1 million from $8.5 millionfor the same period last year. The net sales decrease in the currentperiod related to a decrease in both unit quantities shipped of 19%, and anaverage unit price decrease of 19%, as well as an increase in customer creditsof $0.5 million or 20%. Net sales for the nine months ended September 30, 2006reflect the operating results of the Woodridge business only from the March 9,2006 acquisition to September 30, 2006. The 2007net sales include a $0.2 million charge for expected returns related tothe March 2007 voluntary recall of certain DermaFreeze365TM products sold duringthe nine months ended September 30, 2007.

 

*Gross Profit*.Gross profit for the nine months ended September 30, 2007 decreased $0.7million, or 15% to $4.1 million from $4.8 million for the same period last year.Gross profit in the 2006 period only includes operating activity for thepost-Woodridge acquisition period from March 9, 2006 to September 30, 2006. The2007 gross profit includes a $0.2 million charge for expected returns relatedto the March 2007 product recall of related products sold during the ninemonths ended September 30, 2007. Included within gross profit for the periodended September 30, 2006 is a $1.4 million charge associated with theamortization of the step up to fair value in the inventory acquired fromWoodridge, as required by SFAS 142.

 

*Selling, General and Administrative Expenses.*Selling,general and administrative expenses for the nine months ended September 30,2007 and 2006 was consistent at $5.7 million. Selling, general andadministrative expenses for the nine months ending September 30, 2006 reflectthe operating results of the Woodridge business only from the March 9, 2006acquisition to September 30, 2006. Although spending was consistent year overyear, the composition of spending changed due to lower spending for advertisingand other sales related costs of $0.9 million, offset by higher spending forlegal and accounting professional services of $0.1 million, higher spending forlabor and consulting cost of $0.3 million and higher facilities cost of $0.5million.

 

*Amortization of Intangible Assets.*Amortizationof intangible assets for the nine months ended September 30, 2007 increased$0.5 million to $0.8 million from $0.3 million for the same period last year.The increase from the 2006 relates to the full nine months amortization of theintangible assets acquired as part of the Woodridge acquisition.

 

*Interest Expense*. Interest expense for the ninemonths ended Sept 30, 2007 increased $0.2 million, or 25% to $0.9 million from$0.7 million for the same period last year. The interest expense isattributable to the Credit Agreement that we entered into on March 9, 2006 topartially fund the Woodridge acquisition. Our debt bears interest at LIBOR plus4.50%.

 

*Income Taxes*. For thenine months ended September 30, 2007, our benefit from federal and state taxesamounted to $0.2 million compared to a provision of $0.5 million for the sameperiod in 2006. The decrease in the tax provision of $0.7 million is primarilythe result of the release of certain unrecognized tax benefits in which theperiod for examination has expired. The effective income tax rate reflects thebook to tax difference from goodwill amortization. Additionally, income taxbenefits from the available net operating losses are not reflected in the 2007and 2006 provisions as the realization of these benefits is not deemed morelikely than not.

 

**Liquidity and Capital Resources**

 

Workingcapital was deficit a $1.9 million on September 30, 2007, compared with aworking capital of deficit $0.8 million on December 31, 2006. Included inworking capital were cash and cash equivalents of $0.4 million and $0.6 millionon September 30, 2007 and December 31, 2006, respectively.

 

Net cash used inoperating activities was $4.9 million for the nine months ended September 30,2007. Included in the net cash used in operating activities was the net loss of$3.0 million. Non-cash operating charges including depreciation, amortization,compensation expense and reserves were $2.4 million were offset by $4.3 millionof changes in operating assets and liabilities.

 

Net cash provided in investing activitieswas $1.7 million for the nine months ended September 30, 2007,$2.0 million relating to cash received from the Woodridge acquisition escrowaccount, offset by $0.3 million relating to the purchase of the Heavy Dutyintellectual property and issuance costs.

 

Net cash provided in financing activitieswas $3.0 million for the nine months ended September 30, 2007,$2.5 million relating to cash recovered from the issuance of a note payable and$2.7 million relating to the draw down of the credit revolver, offset by $2.2million relating to the paydown of the revolving credit agreement.

 

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Ourprimary source of liquidity is our cash and cash equivalents, our cashgenerated from operations, and availability under our revolving credit facility.We believe that our current cash on hand and sources of cash aresufficient to meet all expenditures over the next twelve months. Thecash generated by the operations of Woodridge and borrowed by Woodridge underthe revolving credit facility is subject to restrictions as to the amount offunds that may be paid through a dividend to Nextera to pay corporate expenses.We believe that additional liquidity sources, if necessary, could be obtainedby borrowing funds from a third party or raising equity through a public orprivate transaction, although these are subject to restrictions under ourCredit 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”) plus4.50%, or bank base rate plus 3.25%, as selected by Woodridge.

 

OnNovember 7, 2007, we entered into an amendment agreement under the CreditAgreement (the “Third Amendment”). Under the terms of the Third Amendment, weobtained a bridge loan credit facility aggregating $2.5 million. Pursuant tothe Third Amendment, the bridge loan facility, the term loan and the revolvingcredit facility will bear interest at the London Interbank Offered Rate (“LIBOR”)plus 5.0%, or bank base rate plus 4.0%, as selected by us. Outstandingborrowings under the bridge loan facility must be repaid with cash balances inexcess of $500,000 through the final maturity of May 31, 2008. Outstandingborrowings under the term loan must be repaid in 4 quarterly payments,commencing March 31, 2008, with a final payment due on March 31,2009, the maturity date of the term loan. The maturity date for the revolvingcredit facility is also March 31, 2009. The commitment fee on therevolving credit facility is payable quarterly at a rate of 0.50% of the unusedamount of the revolving credit facility per annum. Additionally, the financialcovenants were waived for periods prior to November 7, 2007 and modifiedthereafter.

 

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 ($56,000) at September 30, 2007.

 

Underthe Credit Agreement, as amended, we are subject to certain limitations,including limitations on our ability: to incur additional debt or sell assets,with restrictions on the use of proceeds; to make certain investments andacquisitions; 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, as amended, also contains certainrestrictive financial covenants, including minimum consolidated earnings before interest, taxes, depreciationand amortization (“EBITDA”), minimum purchase order levels and maximumcorporate overhead, as defined..

 

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 payprincipal or interest when due, (ii) our breach or failure to perform anyof the covenants or obligations set forth in the Credit Agreement, which forcertain covenants and obligations is subject to a 30-day cure period,(iii) the acceleration of certain other indebtedness of Woodridge,(iv) our filing of a petition in bankruptcy, (v) the entry of ajudgment or a court order against us in excess of certain specified dollarthresholds, (vi) a reduction below certain levels in the ownership oreconomic interests of our existing significant stockholders in the aggregate or(vii) Mr. Millin ceasing to be a member of our board of directors orthe chief executive officer of Woodridge prior to March 9, 2010, exceptfor certain specified reasons.

 

***FundingAgreement and Note Conversion Agreements***

*** ***

OnApril 16, 2007, we entered into a Funding Agreement with Woodridge, Mounteand Jocott (the “Funding Agreement”). Under the terms of the Funding Agreement,Mounte and Jocott loaned us the principal sums of $1.5 million and $1.0 millionrespectively, pursuant to individual promissory notes. The notes accruedinterest at an annual rate of 7% with principal payable at the maturity date ofApril 1, 2012. We were prohibited from paying interest in cash on thesenotes under the terms of our Credit Agreement. Accordingly, interest wasaccrued and added to the 

 

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principal balance of thenotes. The notes, including accrued interest, were exchanged in connection withthe Note Conversion Agreement discussed below.

 

TheFunding Agreement provides, subject to (i) any required consents or approvalsof the lenders under the Credit Agreement and of any other persons whoseconsent or approval is required at the time under any credit or other contractor agreement to which we, Woodridge or any of our affiliates is a party, (ii)any required consent of the holders of the outstanding Series A Preferred, and(iii) the approval of the Board; that, in the event that our 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 our outstanding preferred stockthe Triggering Event, we will take the following actions:

 

a)              Within 15business days after the occurrence of a Triggering Event, we will issue toJocott shares of Series B Preferred in addition to the shares of Series BPreferred issued in connection with the Note Conversion Agreement, at a priceequal to $100 per share. The number of such additional shares to be issued toJocott will be equal to the quotient obtained by dividing (i) the sum of (A)$1,000,000, plus (B) the Appreciation Amount defined below, by (ii) 100, androunding down to the nearest whole share. Such shares of Series B Preferredwill be issued to Jocott in consideration of Jocott’s irrevocable payment ofthe $2.0 million indemnity deposit and Jocott’s compromise and settlement ofthe past, pending and future specified claims. The “Appreciation Amount” meansan amount equal to a deemed appreciation equal to (1) $1,000,000, multiplied by(2) seven percent (7%) per annum, compounded annually, calculated from the datethat Jocott loaned the funds to us pursuant to the promissory note issued byJocott until the date of the any issuance of the additional shares of Series BPreferred to Jocott.

 

b)             Within 15business days after the occurrence of a Triggering Event, we will also issue toJocott the same number of shares of our Series C Cumulative Non-ConvertiblePreferred Stock or Series C Preferred, as the number of additional shares ofSeries B Preferred issued to Jocott. The Series C Preferred will (i) be issuedat a price equal to $100 per share, (ii) have a liquidation preference equal to$100 per share and (iii) provide for a 7% paid-in-kind dividend. The Series CPreferred will not be convertible into any other securities of ours and theSeries C Preferred will rank (i) junior to the Series A Preferred as to thepayment of dividends and as to the distribution of assets upon liquidation,dissolution or winding up, and (ii) on a parity with the Series B Preferred asto the payment of dividends and the Special Redemption Right noted below, butrank junior to the Series B Preferred as to the distribution of assets uponliquidation, dissolution or winding up. The Series C Preferred will bestructured so as to comply with any applicable restrictions in any credit orother contract or agreement to which we, Woodridge or any of our affiliates isa party. Such shares of Series C Preferred will be issued to Jocott inconsideration of Jocott’s irrevocable payment of the $2.0 million indemnitydeposit and Jocott’s compromise and settlement of the past, pending and futurespecified claims.

 

c)              We willgrant to the holders of Series A Preferred, Series B Preferred and Series CPreferred the right or the Special Redemption Right, the exercise of which isconditioned upon the occurrence of a Triggering Event, the request of theholders and the approval of our board of directors,  to redeem all or a portion of the shares ofthe Preferred Stock held by such holders at a redemption price equal to $100per share (plus any applicable accrued but unpaid dividends on the shares soredeemed). The Special Redemption Right of the holders of Series A Preferredwill be senior and prior to the Special Redemption Rights of the holders ofSeries B Preferred and Series C Preferred, and the Special Redemption Rights ofthe holders of Series B Preferred and Series C Preferred will be on a paritywith each other.

 

Additionally,under the provisions of the Funding Agreement, in connection with and at thetime of the issuance of any Series B Preferred and/or Series CPreferred, we will issue warrants to purchase our Class A Common Stock atan exercise price of $0.50 per share (the “Warrants”) to the holder of suchSeries B Preferred and/or Series C Preferred. The number of shares ofour Class A Common Stock for which such warrants will be exercisable willbe equal to (i) with respect to notes redeemed or exchanged forSeries B Preferred , the product of (A) the outstanding principalbalance plus all accrued but unpaid interest that was redeemed or exchanged,multiplied by (B) two (2); (ii) 2,000,000 shares with respect to theSeries B Preferred Stock issued upon the occurrence of a Triggering Event(when and if such Series B Preferred is issued), and (iii) 2,000,000shares with respect to the Series C Preferred issued upon the occurrenceof a Triggering 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.

 

OnJune 15, 2007, we entered into a Note Conversion Agreement whereby weexchanged all outstanding principal and accrued interest owed to Mounte andJocott pursuant to individual promissory notes executed in connection with theFunding Agreement for 15,169 and 10,113 shares, respectively, of Nextera’sSeries B Preferred, together with a cash payment in lieu of fractional shares.The Series B Preferred was issued at a price of $100 per share, has a 

 

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liquidation preferenceof $100 per share, provides for a 7% per annum cumulative paid-in-kinddividend, and entitles its holders to a number of votes equal to the number ofshares held. The Series B Preferred is not convertible into any of ourother securities and ranks junior to the Series A Preferred Stock as tothe payment of dividends, the issuance of a special redemption, and thedistribution of assets upon liquidation, dissolution or winding up. TheSeries B Preferred is structured so as to qualify as “Permitted EquityInterests” as such term is defined in our Credit Agreement, as amended.

 

In connection with theissuance of Series B Preferred, we also issued a Class A Common StockPurchase Warrant to each of Mounte and Jocott, pursuant to the terms of aFunding Agreement. Under such Warrants, we granted Mounte and Jocott the rightto purchase 3,033,945 and 2,022,630 shares, respectively, of our Class ACommon Stock at an exercise price of $0.50 per share, exercisable at any timeat the option of the holder. The Warrants have a ten- (10) year  term and have customary piggybackregistration rights and anti-dilution rights with respect to specified events.The fair value of the warrants has been determined to be $647,000. This amountwas calculated using the Black-Scholes pricing model with the followingassumptions: 118.9% volatility; expected term of 10 years; 5.10% risk-freerate; and 0% dividend.

 

The Series B Preferred isclassified as mezzanine equity as the Special Redemption Right is effectivelyredeemable at the option of the holder and ais not solely within the control ofthe issuer. The initial carrying amount of the Series B Preferred is the fairvalue at issuance. The Series B Preferred will not be accreted to theredemption value of $2.5 million until redemption is considered probable. The7% paid-in-kind dividend accrues to the carrying value of the Series BPreferred.

 

**CertainContractual Obligations, Commitments and Contingencies**

 

The following summarizesour significant contractual obligations and commitments at September 30, 2007that impact our liquidity.

 
| ** **                                  | ** ** | **Payments due by Period** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations  (in thousands)** | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
|                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                              |       | $                          | 9,500      |   | $ | 750 |   | $ | 8,750 |   | $ | — |   | $ | — |   |
| Leases                                      |       | 1,702                      |       | 445 |   | 862 |   | 395 |   | — |   |
| Total                                       |       | $                          | 11,202     |   | $ | 1,195 |   | $ | 9,612 |   | $ | 395 |   | $ | — |   |

 

**OffBalance Sheet Arrangements**

 

We have not entered intoany off-balance sheet transactions, arrangements or obligations (includingcontingent obligations) that have, or are reasonably likely to have, a materialeffect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources.

 

**CriticalAccounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosures of contingent assets and liabilities.

 

We believe theaccounting policies below represent our critical accounting policies. See ourAnnual Report on Form 10-K for the year ended December 31, 2006 for a detaileddiscussion on the application of these and other accounting policies.

 

***Revenue Recognition,******Allowances for Sales Returnsand Markdowns**–*** Werecognize sales when title and risk of loss transfer to the customer, the salesprice is fixed or determinable and collection of the resulting receivable isprobable. Sales are recorded net of estimated returns and other allowances. Ourprovision for sales returns represents management’s estimate of future returnsbased on historical experience and considering current external factors andmarket conditions.

 

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Our sales-return accrualis a subjective critical estimate that has a direct impact on reported netsales.  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 ofknown or anticipated events that we have considered, and will continue toconsider, include, but are not limited to, the solvency of our customers, storeclosings by retailers, changes in the retail environment, including mergers andacquisitions, and our decision to continue or support new and existingproducts. Actual sales returns and markdowns may differ significantly, eitherfavorably or unfavorably, from these estimates.

 

***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 and Intangible Assets**–*****We haveaccounted for our acquisitions under the purchase method of accounting forbusiness combinations. Under the purchase method of accounting, the costs,including transaction costs, are allocated to the underlying net assets, basedon their respective estimated fair values. The excess of the purchase priceover the estimated fair values of the net assets acquired is recorded asgoodwill.

 

Our judgments made in determiningthe estimated fair value and expected useful lives assigned to each class ofassets and liabilities acquired can significantly affect net income. Forexample, different classes of assets will have useful lives that differ and theuseful life of property, plant, and equipment acquired will differsubstantially from the useful life of brand licenses and trademarks.Consequently, to the extent a longer-lived asset is ascribed greater valueunder the purchase method than a shorter-lived asset, net income in a givenperiod 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, 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.

 

***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 AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

**InterestRate Risk**

 

As of September 30, 2007,we had $9.5 million in floating rate debt under the term loan of ourCredit Agreement. Changes in interest rates would not significantly affect thefair value of our outstanding indebtedness. Our term loan currently bears interestat the six-month LIBOR rate plus 4.50%. Our revolving credit facility bearsinterest at different rates, ranging from one-month and three-month LIBOR plus4.50% to base rate plus 3.25%. We have an interest rate collar agreementpertaining to $5.0 million of our term loan with respect to thethree-month LIBOR rate, which effectively caps the rate at 6% and provides fora 5% floor. Assuming the outstanding balance on our floating rate indebtednessremains constant over a year, a 100 basis point increase in the interest ratewould decrease pre-tax income and cash flow by approximately$0.12 million.

 

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**ForeignCurrency Risk**

 

We are not currentlyexposed to foreign currency risk because we do not currently have materialbusiness operations in foreign countries or any related sales and expenses

 

**ITEM 4.    CONTROLSAND PROCEDURES.**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports under the Securities Exchange Act of 1934, asamended, and the rules and regulations thereunder, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information is accumulatedand communicated to management, including our President and Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

As required by SECRule 13a-15(b), we carried out an evaluation, under the supervision andwith the participation of our management, including our President and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on the foregoing, our President and Chief Financial Officerconcluded that our disclosure controls and procedures were effective at thereasonable assurance level as of September 30, 2007.

 

There have been nochanges in our internal controls over financial reporting during our mostrecent fiscal quarter that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting**.**

 

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**PART II – OTHER INFORMATION**

 

**ITEM1A.    RISK FACTORS.**

 

Risk factors describingthe major risks to our business can be found under Item 1A, “Risk Factors,” inour Annual Report on Form 10-K for the fiscal year ended December 31, 2006,from which Item 1A. is hereby incorporated by reference. There has been nomaterial change in our risk factors from those previously discussed in theAnnual Report on Form 10-K.

 

**ITEM 2.    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

On July 24, 2007, Nexteraissued shares of  Class A Common Stock toKKG BodyFuels Foods in connection with Independent Contractor Agreement. which transactions were exempt from registrationpursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule506 of Regulation D. Nextera previously disclosed these transactions in aQuarterly Report on Form 10-Q dated June 30, 2007 filed with the SEC on August13, 2007, which disclosure is incorporated herein by reference.

 

**ITEM 6.****    ****EXHIBITS.**

 

(a)          Exhibits

 
| 10.1(1) |   | Amendment Agreement  under the Woodridge Labs Credit Agreement dated as of November 7, 2007 by and  among Nextera Enterprises, Inc., Woodridge Labs, Inc. the lenders party  thereto and NewStar Financial, Inc. (as administrative agent for the lenders) |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                                                                                                                                                                                                                                |

 

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(1)                                        Filedas an exhibit to Nextera’s Current Report on Form 8-K dated November 9, 2007filed wit the SEC on November 9, 2007.

 

*                                               Filed herewith.

 

***                                 Furnished solely to accompany thisquarterly report pursuant to 18 U.S.C. § 1350, and not filed for purposes ofSection 18 of the Securities Exchange Act of 1934, as amended, and is not to beincorporated by reference into any filing of Nextera Enterprises, Inc., whethermade before or after the date hereof, regardless of any general incorporationlanguage in such filing.

 

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**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:  November 14, 2007 |   | By:  /s/ Joseph J. Millin      |   |
|                     |   | Joseph  J. Millin              |
|                     |   | President                      |
|                     |   | (Principal  Executive Officer) |
|                     |   |                           |
| Date:  November 14, 2007 |   | By:  /s/ Antonio Rodriquez     |   |
|                     |   | Antonio  Rodriquez             |
|                     |   | Chief  Financial Officer       |
|                     |   | (Principal  Financial Officer) |

 

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