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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-25995
 NEXTERA ENTERPRISES, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    95-4700410
(I.R.S. Employer
Identification Number)
 
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  Yes o
    
    No þ




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##### 



Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    21EXHIBIT 10.3.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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March 31,
    
    December 31,2006
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,642
    
    
    $
    15,043Accounts receivable
    
    
    854
    
    
    
    Inventory
    
    
    3,484
    
    
    
    Due from supplier
    
    
    270
    
    
    
    Prepaid expenses and other current assets
    
    
    460
    
    
    
    128Total current assets
    
    
    8,710
    
    
    
    15,171Property and equipment, net
    
    
    122
    
    
    
    22Goodwill
    
    
    17,096
    
    
    
    Intangible assets, net
    
    
    6,069
    
    
    
    Other assets
    
    
    782
    
    
    
    42Total assets
    
    $
    32,779
    
    
    $
    15,235Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    1,477
    
    
    $
    542Revolving credit facility
    
    
    2,000
    
    
    
    Current portion of long-term debt
    
    
    750
    
    
    
    Total current liabilities
    
    
    4,227
    
    
    
    542Long-term debt
    
    
    10,250
    
    
    
    Other long-term liabilities
    
    
    1,334
    
    
    
    1,334Commitments and contingencies (Note 11)
    
    
    
    
    
    
    Stockholders equity:Preferred Stock, $0.001 par value,
10,000,000 shares authorized, 600,000
authorized shares designated Series A,
49,745 and 48,906 Series A issued and
outstanding at March 31, 2006 and
December 31, 2005, respectively
    
    
    4,974
    
    
    
    4,890Class A Common Stock, $0.001 par value,
95,000,000 shares authorized, 38,492,851
and 30,025,441 shares issued and
outstanding at March 31, 2006 and
December 31, 2005, respectively
    
    
    38
    
    
    
    30Class B Common Stock, $0.001 par value,
4,300,000 shares authorized, 3,844,200
shares issued and outstanding at March
31, 2006 and December 31, 2005
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    165,312
    
    
    
    161,130Accumulated deficit
    
    
    (153,360
    )
    
    
    (152,695
    )Total stockholders equity
    
    
    16,968
    
    
    
    13,359Total liabilities and stockholders equity
    
    $
    32,779
    
    
    $
    15,235
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Three Months EndedMarch 31,2006
    
    2005Net sales
    
    $
    1,096
    
    
    $
    Cost of sales
    
    
    540
    
    
    
    Gross profit
    
    
    556
    
    
    
    Selling, general and administrative expenses
    
    
    1,212
    
    
    
    565Amortization of intangibles
    
    
    31
    
    
    
    Operating loss
    
    
    (687
    )
    
    
    (565
    )Interest income
    
    
    125
    
    
    
    59Interest expense
    
    
    (74
    )
    
    
    Loss from continuing operations before income taxes
    
    
    (636
    )
    
    
    (506
    )Provision for income taxes
    
    
    29
    
    
    
    6Loss from continuing operations
    
    
    (665
    )
    
    
    (512
    )Income from discontinued operations
    
    
    
    
    
    
    21Net loss
    
    
    (665
    )
    
    
    (491
    )Preferred stock dividends
    
    
    (84
    )
    
    
    (78
    )Net loss applicable to common stockholders
    
    $
    (749
    )
    
    $
    (569
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.02
    )
    
    $
    (0.02
    )Discontinued operations
    
    
    
    
    
    
    Net loss per common share, basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.02
    )Weighted average common shares outstanding, basic and diluted
    
    
    35,940
    
    
    
    33,870
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Three Months EndedMarch 31,2006
    
    2005Operating activitiesNet loss
    
    $
    (665
    )
    
    $
    (491
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    12
    
    
    
    5Amortization of Intangible assets
    
    
    31
    
    
    
    Stock based compensation
    
    
    40
    
    
    
    1Change in operating assets and liabilities:Accounts receivable
    
    
    238
    
    
    
    Inventory
    
    
    341
    
    
    
    Prepaid expenses and other assets
    
    
    (205
    )
    
    
    (33
    )Accounts payable and accrued expenses
    
    
    238
    
    
    
    9Net cash provided by (used in) operating activities
    
    
    30
    
    
    $
    (509
    )Investing activitiesAcquisition of business, net of cash acquired
    
    
    (22,951
    )
    
    
    Proceeds from sale of business
    
    
    
    
    
    
    87Net cash (used in) provided by investing activities
    
    
    (22,951
    )
    
    
    87Financing activitiesBorrowings under revolving credit facility
    
    
    3,000
    
    
    
    Borrowings under term note
    
    
    10,000
    
    
    
    Payment of note acquired in acquisition
    
    
    (1,000
    )
    
    
    Payment of debt issuance costs
    
    
    (480
    )
    
    
    Net cash provided by financing activities
    
    
    11,520
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (11,401
    )
    
    
    (422
    )Cash and cash equivalents at beginning of period
    
    
    15,043
    
    
    
    16,713Cash and cash equivalents at end of period
    
    $
    3,642
    
    
    $
    16,291
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Note 1. Basis of Presentation
      Note 2. Nature of Business
  ® ® ® ® ®
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Note 3. Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Accounts Receivable
  Inventory
  Property and Equipment
  Tools and Dies
    
    3 yearsMachinery and Equipment
    
    3 - 5 yearsFurniture and Fixtures
    
    3 - 5 yearsSoftware
    
    3 years
 Goodwill
 Goodwill and Other
Intangible Assets,
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Intangible Assets
  Deferred Financing Costs
  Financial Instruments
  Income Taxes
  Revenue Recognition
  Advertising
  Stock-Based Compensation and Other Equity Instruments
 Share-Based
Payment,
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Three months EndedMarch 31, 2005(Amounts in thousands, exceptper share data)Net loss, as reported
    
    $
    (491
    )Compensation expense under fair value-based
accounting method
    
    
    (50
    )Pro forma net loss
    
    $
    (541
    )Net loss per common share, basic and diluted:As reported
    
    $
    (0.02
    )Pro forma
    
    $
    (0.02
    )
  2005Risk-free interest rates
    
    
    3.50
    %Expected lives (years)
    
    
    4Expected volatility
    
    
    80
    %Dividend rate
    
    
    0
    %
 Reclassifications
  Recently Issued Accounting Pronouncements
 Inventory Costs
 Note 4. Acquisition of Woodridge Labs, Inc.
   
    
    $23.2 million in cash including $0.7 million of acquisition expenses paid to third parties;
    
    8,467,410 unregistered restricted shares of Nexteras Class A Common Stock constituting
approximately 20% of the total outstanding common stock of Nextera immediately after such
issuance, which shares were issued to Jocott. Such shares had a value of $4.2 million on
the date of the transaction;
 
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
    
    the assumption of a promissory note of Jocott in the principal amount of $1.0 million,
which assumed debt was paid in full by the Company on the closing date of the Transaction;
and
    
    an earn-out of up to $2.5 million which is payable if the audited earnings before
interest, income taxes, depreciation and amortization (EBITDA) of Woodridge for the period
from the closing date of the Transaction through December 31, 2006 exceeds $4.2 million,
and is fully earned at approximately $6.5 million of audited EBITDA of Woodridge. This
earn-out amount, if any, is payable in the second quarter of 2007.
   Current assets
    
    $
    5,548Long-term assets
    
    
    388Goodwill
    
    
    17,096Intangible assets
    
    
    6,100Total assets acquired
    
    $
    29,132Less liabilities assumed
    
    
    (1,697
    )$
    27,435
  Three Months EndedMarch 31,2006
    
    2005(In thousands except per sharedata)Net sales
    
    $
    3,275
    
    
    $
    3,880Income (loss) from continuing operations before
income taxes
    
    
    (386
    )
    
    
    115Net income (loss)
    
    
    (415
    )
    
    
    86Preferred stock dividends
    
    
    (84
    )
    
    
    (78
    )Net income (loss) applicable to common stockholders
    
    $
    (499
    )
    
    $
    8
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Weighted average common shares outstandingbasic
and diluted
    
    
    42,337
    
    
    
    42,337Basic and diluted loss per share
    
    $
    (0.01
    )
    
    $
    0.00
  Note 5. Inventories
  March 31, 2006(in thousands)Raw materials
    
    $
    978Finished goods
    
    
    2,506$
    3,484
  Note 6. Property and Equipment
  March 31,
    
    December 31,2006
    
    2005(In thousands)Equipment
    
    $
    71
    
    
    $
    37Tools and dies
    
    
    65
    
    
    
    Software
    
    
    17
    
    
    
    7Furniture and fixtures
    
    
    10
    
    
    
    8163
    
    
    
    52Less: accumulated depreciation
    
    
    41
    
    
    
    30Property and equipment, net
    
    $
    122
    
    
    $
    22
 Note 7. Intangible Assets
  March 31, 2006(In thousands)Goodwill
    
    $
    17,096Trademarks and brands
    
    $
    2,800Covenant not to compete
    
    
    1,900Customer relationships
    
    
    1,4006,100Less: accumulated amortization
    
    
    31Intangible assets, net
    
    $
    6,069
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Note 8. Financing Arrangements
     12




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March 31, 2006Term loan
    
    $
    10,000Revolving credit facility
    
    
    3,000$
    13,000Current portion of long-term debt (including $2.0 million
of the revolving credit facility which is expected to be
repaid during the next twelve months)
    
    
    2,750$
    10,250
  (In thousands)Twelve months ending December 31,
2006
    
    $
    5002007
    
    
    1,0002008
    
    
    1,2502009
    
    
    1,7502010
    
    
    6,250thereafter
    
    
    2,250$
    13,000
 Note 9. Basic and Diluted Net Income (Loss) per Common Share
   Three Months Ended March 31,2006
    
    2005(dollar amounts in thousands,except per share data)Loss from continuing operations
    
    $
    (665
    )
    
    $
    (512
    )Preferred stock dividends
    
    
    (84
    )
    
    
    (78
    )Loss from continuing operations
applicable to common stockholders
    
    
    (749
    )
    
    
    (590
    )Income from discontinued operations
    
    
    
    
    
    
    21Net loss applicable to common stockholders
    
    $
    (749
    )
    
    $
    (569
    )Weighted average common shares
outstandingbasic and diluted
    
    
    35,940
    
    
    
    33,870
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Basic and diluted net loss per common shareLoss from continuing operations
    
    $
    (0.02
    )
    
    $
    (0.02
    )Income from discontinued operations
    
    
    
    
    
    
    Net loss per common share, basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.02
    )
 Note
10. Income Taxes
  Note
11. Commitments and Contingencies
   14




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As used in this report, the terms we, our, ours, and us refer to Nextera Enterprises, Inc,
a Delaware Corporation, or Nextera, and its wholly owned subsidiaries. In addition, the term
Woodridge refers to Jocott Enterprises, Inc., or Jocott (the prior owner of the Woodridge
business), for all periods prior to March 9, 2006, and to Woodridge Labs, Inc., a wholly owned
subsidiary of Nextera, from and after March 9, 2006, unless the context indicates otherwise
   Overview
  Acquisition of Woodridge Business
   
    
    $23.2 million in cash including $0.7 million of acquisition expenses paid to third parties;
    
    8,467,410 unregistered restricted shares of Nexteras Class A Common Stock constituting
approximately 20% of the total outstanding common stock of Nextera immediately after such
issuance, which shares were issued to Jocott. Such shares had a value of $4.2 million on
the date of the transaction;
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
    
    the assumption of a promissory note of Jocott in the principal amount of $1.0 million,
which assumed debt was paid in full by us on the closing date of the Transaction; and
    
    an earn-out of up to $2.5 million which is payable if the audited earnings before
interest, income taxes, depreciation and amortization (EBITDA) of Woodridge for the period
from the closing date of the Transaction through December 31, 2006 exceeds $4.2 million,
and is fully earned at approximately $6.5 million of audited EBITDA of Woodridge. This
earn-out amount, if any, is payable in the second quarter of 2007.
  Comparison of the Three Months Ended March 31, 2006 and the Three Months Ended March 31, 2005
 Net Sales
 Gross Profit
 Selling, General and Administrative Expenses.
 Interest Income
 Interest Expense
 Income Taxes
 Liquidity and Capital Resources
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Certain Contractual Obligations, Commitments and Contingencies
  Payments due by PeriodContractual Obligations
    
    
    
    
    
    Less than 1(in thousands)
    
    Total
    
    year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsLong-term debt
    
    $
    13,000
    
    
    $
    750
    
    
    $
    1,688
    
    
    $
    10,562
    
    
    $
    Operating leases
    
    
    338
    
    
    
    232
    
    
    
    106
    
    
    
    
    
    
    
    Total contractual
obligations
    
    $
    13,338
    
    
    $
    982
    
    
    $
    1,794
    
    
    $
    10,562
    
    
    $
    
 Off Balance Sheet Arrangements
  Critical Accounting Policies
  Revenue Recognition.
 Allowances for Sales Returns and Markdowns.
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Provisions for Inventory Obsolescence.
 Goodwill and Other Intangible Assets.
  
  Interest Rate Risk
  Foreign Currency Risk
  
    .
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(a)
    
    Exhibits
 10.3.1* #
    
    Employment Agreement dated as of
April 1, 2006 by and
between Nextera Enterpirses, Inc. and Michael P. Muldowney.10.6.2(1)#
    
    Letter dated as of January 25, 2006 between Richard V. Sandler
and Nextera Enterprises, Inc.10.10(2)
    
    Credit Agreement dated as of March 9, 2006 by and among Nextera
Enterprises, Inc., W Lab Acquisition Corp. and NewStar
Financial, Inc. (as administrative agent).10.11(2)
    
    Guaranty Agreement dated as of March 9, 2006 by and among
Nextera Enterprises, Inc., W Lab Acquisition Corp. and NewStar
Financial, Inc. (as administrative agent).10.12(2)
    
    Security Agreement dated as of March 9, 2006 by and among
Nextera Enterprises, Inc., W Lab Acquisition Corp. and NewStar
Financial, Inc. (as administrative agent).10.13(2)
    
    Pledge Agreement dated as of March 9, 2006 by and among Nextera
Enterprises, Inc., W Lab Acquisition Corp. and NewStar
Financial, Inc. (as administrative agent).10.14(3)
    
    Asset Purchase Agreement dated as of March 9, 2006 by and among
Nextera Enterprises, Inc., W Lab Acquisition Corp., Woodridge
Labs, Inc., Joseph J. Millin and Valerie Millin, Trustees of
the Millin Family Living Trust Dated November 18, 2002, Scott
J. Weiss and Debra Weiss, as Trustees of the Scott and Debra
Weiss Living Trust, Joseph J. Millin, and Scott J. Weiss.10.15(3)
    
    Stock Pledge and Security Agreement dated as of March 9, 2006
by and among Nextera Enterprises, Inc., W Lab Acquisition Corp.
and Woodridge Labs, Inc.10.16(3)#
    
    Employment Agreement dated as of March 9, 2006 by and among
Nextera Enterprises, Inc., W Lab Acquisition Corp. and Joseph
J. Millin.10.17(3)#
    
    Employment Agreement dated as of March 9, 2006 by and among
Nextera Enterprises, Inc., W Lab Acquisition Corp. and Scott J.
Weiss.31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification32.1
    
    Section 1350 Certification32.2
    
    Section 1350 Certification
 
 *
    
    Filed herewith.#
    
    Indicates a management plan or compensatory plan or arrangement.(1)
    
    Filed as an exhibit to Nexteras Current Report on Form 8-K filed on January 26, 2006, and
incorporated herein by reference(2)
    
    Filed as an exhibit to Nexteras Current Report on Form 8-K filed on March 10, 2006, and
incorporated herein by reference.(3)
    
    Filed as an exhibit to Nexteras Current Report on Form 8-K filed on March 15, 2006, and
incorporated herein by reference. 20




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NEXTERA ENTERPRISES, INC.(Registrant)Date: May 15, 2006
    
    By: /s/ Joseph J. MillinJoseph J. MillinPresident(Principal Executive Officer)Date: May 15, 2006
    
    By: /s/ Michael P. MuldowneyMichael P. MuldowneyChief Operating Officer and Chief Financial Officer(Principal Financial Officer)
 21